May 7, 2019

For most of the month of April, I have been highlighting the strong technical action for world markets, while the economic data outside the U.S. has been nothing to write home about. But for all of us that respect the charts, the strong price action in global indexes was simply a precursor to what is now just crossing the tape in the past two weeks – evidence that the global economy is turning up.
It started on April 16 with the release China’s first-quarter GDP reading of +6.4%, just above the +6.3% rate of expansion expected by analysts surveyed by Reuters. Global markets were quick to respond by trading higher. Then, two weeks later, on April 30, it was reported that first-quarter Eurozone growth rose to +0.4%, double that of the +0.2% rate recorded in the fourth quarter of 2018.
Three main takeaways included Spain leading the way with +0.7% growth, France maintained its +0.3% growth rate, and Italy may be out of recessionary territory after posting growth of +0.2%. (All numbers are quarter-over-quarter, not annualized.) The common driver to this better-than-expected GDP data appears to be job creation. Unemployment across Europe fell to its lowest level since at least 2000.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

The U.S. market, as measured by the S&P’s +18.26% YTD performance, has held center stage for where the best risk/reward ratios appear to be, but the Euro STOXX 50 Index has quietly rallied +16.69% YTD. Unlike the S&P, which is trading at a new all-time high, the Euro STOXX 50 Index, which closed at 3,502 last Friday, is 2,000 points (or 36%) off of its all-time high of 5,500 set back in early 2000.

Similarly, China’s Shanghai Composite Index (chart below) is trading 49% below its all-time high, set back in 2007, and Japan’s Nikkei 225 index is trading 43% below its all-time high of 38,957 set on December 29, 1989. While Japan’s aging population and strict immigration laws are a major long-term headwind toward any quest for new market highs, China’s booming population and ambitious overseas expansion into emerging markets makes for a better case for that market to exceed the prior high.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

As to Europe, that’s a tough call. Many of the finest industrial, healthcare, and consumer products in the world are made in Europe, but that continent suffers from an economic model that has aged, along with its population. Most of the great companies in Europe were formed many decades ago. There is no “Silicon Valley” of emerging technologies in Europe and the region badly needs new leadership in this area.

Europe can do something about their ongoing sovereign debt crisis, the immigration crisis, the pending Brexit crisis, and trade challenges when elections to a new European Parliament take place later this month (May 23-26). That will bring in new leadership that includes a new head of the European Central Bank and the European Commission. Europe is heavily dependent on exports, and some new blood might do much to improve the trade tensions and promote more free-trade agreements. With this said, European stocks are higher on what I believe is hopeful optimism that the elections will bring positive change.

Fat Dividend Yields from European Bank Stocks Come with Elevated Risks

The hunt for safe yield around the globe has brought a flight of capital to the U.S. for both income-producing bonds and equities. Aside from the attraction of U.S. Treasuries, the market is awash in investment-grade corporate debt and blue-chip stocks that pay 3%-5%. The high quality of those income streams backed by a bull market in the dollar just keeps the money flowing in from around the globe.

With the latest round of economic news for Europe showing signs of improvement, will investors start to accumulate a sector that has been rocked and not really been a part of the year-to-date rally for the Euro STOXX 50 Index? I’m speaking of the banking sector, which has been acting like a rudderless ship because of the ill-timed taking on of emerging market debt, coupled by a long and very slow climb out of the Great Recession, of which the effects still weigh heavily on Italy’s banks and Germany’s big banks.

However, within the carnage of the broader banking sector in Europe, there seem to be some potential diamonds in the rough that are sporting some juicy payouts. After citing some improving growth trends in Spain and France, the stocks of France’s top bank, Société Générale ADR (SCGLY), paying a 7.7% dividend yield and Spain’s top bank, Banco Santander S.A. ADR (SAN), paying a 5.3% dividend yield, are starting to show positive fund flows and gradual stock price appreciation.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

I don’t own either stock and am simply making an observation about how the charts of both stocks are looking better. Shares of London-based HSBC Holdings plc (HSBC), which pays out an attractive 5.7% dividend yield, and has huge exposure to Asia, is also the breaking out to the upside from a six-month basing formation. Swiss-based UBS Group AG (UBS) is also catching a bid and pays a yield of 5.22%.

(Navellier & Associates does not own SCGLY, HSBC, UBS and SAN in managed accounts or our sub-advised mutual fund.  Bryan Perry does not own SCGLY, HSBC, UBS and SAN in personal accounts.)

I have no position in HSBC or UBS, either, but am becoming increasingly intrigued by the positive turn for these leading bank stocks and others. Is this move higher for the sector a bull-trap, or is something happening fundamentally underneath that isn’t getting much mention by the analyst community?

So much depends on how the ongoing trade and tariff situation plays out. All that emerging market debt (some of which is non-performing) is still very much there. But if the charts don’t lie, then just maybe, the bottom for Europe’s banking sector is in.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. *All content of “Income Mail” represents the opinion of Bryan Perry*

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