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Europe Insights

The divergent pathways
19 October 2023
    Download the full reportPDF, 2.49MB

    Summary

    This edition of Europe Insights explores the divergence in economic and market performance across Europe. Germany’s structural challenges have rippled through to its close partners in the eurozone, while energy-intensive sectors struggle with high energy costs. In markets, the financial industry prepares for implementing the latest EU directives on debt restructuring, and cracks are beginning to emerge in the performance of growth stocks.

    Divergences across Europe

    • The Russia-Ukraine conflict-induced energy crisis has led to economic divergence in Europe
    • Germany faces structural challenges due to the end of affordable Russian gas supply and struggles to access the Chinese market, impacting its manufacturing sector, particularly energy-intensive industries
    • Germany aims to address its structural challenges with reforms and a significant investment fund for climate change mitigation, while tourism-driven countries benefit from EU Recovery and Resilience funds to stimulate growth

    Fixed Income: Recovery values at stress

    • EU latest directives aim to establish a harmonised framework for early-stage debt restructuring, allowing financially distressed debtors to avoid formal insolvency proceedings, and giving viable businesses a second chance
    • The directive’s impact on trends is yet unclear due to limited data, but 2023 has seen a decline in recoveries, especially for senior unsecured bondholders, suggesting potential differentiation in the treatment of different bondholder classes
    • Asset managers may need to reconsider remuneration for senior and unsecured positions and proactively anticipate distress situations due to potential differences in creditor treatment resulting from the new restructuring framework and cross-class mechanism

    Equities: Value and growth on divergent pathways

    • Value investing has a strong track record of outperforming growth over the long term, but shorter-term trends can see growth take the lead, often coinciding with market bubbles
    • The current unusual valuation gap between growth and value stocks could potentially be due to crises, interest rates, and herd behaviour
    • Current market conditions indicate that growth stocks seem overvalued, and recent developments suggest cracks in their performance, potentially signalling a shift in favour of value stocks