While there is no denying the cyclical recovery in Europe, and one that is benefiting the periphery more than the core at present, the challenge at the stock level is coming from agonisingly low levels of nominal GDP growth.
Imbalanced bounce back
An absence of inflation is limiting the potential for a strong rebound in sales growth, which is why the recovery has been so uneven and unexciting thus far. Positive surprises in reported sales numbers continue to lag behind profit figures, suggesting that cost cutting is still at the forefront of the corporate mindset. High energy costs in Europe are an additional challenge for European companies and a drag on growth.
With no significant aggregate increase in productivity through innovation, it is down to initiatives at the company or industry level to generate pockets of growth. This is why cost cutting and internal deflationary pressures will remain a feature for some time in Europe.
Any introduction of quantitative easing is an added benefit to the European story and is not an essential element for the region. But weak pricing power ensures that not all companies can be winners, so careful stock selection remains paramount. Disinflation and low productivity growth combine to ensure that this is a far from ‘normal’ recovery.
Andrew Parry is chief executive of Hermes Sourcecap
