In Short: Brexit clouds mask an improving Europe story

05-05-2016

Worries over the outcome of next month’s vote on whether Britain will stay or exit the European Union (EU) are overshadowing a bigger and better story in Europe these days—namely, improving economies in much of the continent, favorable valuations and an expected reversal of the recent weaker dollar-stronger euro trade, all of which are positive for European equities. Euro-area GDP surprised to the upside in the first quarter, rising at a significantly faster annualized pace than growth in the U.S., and data indicate the momentum has continued.

In fact, the eurozone is the biggest overweight in the international equity team’s country/region selection. One key reason is that after experiencing back-to-back crises—2008’s global meltdown followed by Greece—the continent is experiencing a surge of pent-up demand. For example, led by the southern-tier countries most heavily impacted by the crises, EU auto sales rose a 31st straight month in March and were up 8.2% year-over-year in the first quarter. We also like Central and Eastern Europe, where the emerging countries of Poland, the Czech Republic and Hungary are benefiting from their heavy trade with developed Europe. That entire region is experiencing above-trend growth, abetted by the eurozone recovery, rising internal demand and, as a largely oil-importing region, the prolonged 1½-year decline in oil and energy prices, the recent rally notwithstanding.

To be sure, the buildup to the Brexit vote could introduce volatility, which would only worsen if Brits did vote to abandon the EU, a process that could take years to fully accomplish. In recent months, bookmakers consistently have put the odds of UK remaining in the EU at 60-to-80%. While we’ll know for sure in seven weeks, we would suggest long-term investors be mindful of what’s happening now in Europe—not what may or more likely, may not happen in June.