Morgan Stanley | Unlike previous crises, where previous levels of hours worked or investment were never recovered, we believe that now is different and that Europe will have higher growth rates (4-5%) thanks to the fact that the ECB has been much more proactive and that there has been no fiscal austerity (furloughs schemes all over Europe, SURE program and the recovery fund). This last one tries to avoid the investment deficit that occurred after previous crises.
The size of the Recovery Fund is very relevant, equivalent to 5% of the European Union’s GDP (10-15% in Greece, Spain and Italy). In contrast to the US, where the fiscal stimulus has been earmarked for more immediate/current spending, in Europe most of it is devoted to future investment with a long-lasting effect over the next 3-5 years. This long term duration is the key concept and the fundamental reason for our preference.
In addition, in Europe we have Draghi, which is great news. The analysts’ consensus expects him to be in office for a year, but perhaps he could last until May 2023 elections. He is focused on making very good use of the Recovery Fund and at the European level he will also have great influence. On vaccines, although Europe is lagging behind the UK and US, we believe that by the end of 3Q the vaccination program will be completed.
In addition, Europe could benefit more from the global reflation trade as inflation and bond yields will continue to rise, albeit to a lesser extent than in the US. MSCI Europe is very international (only 35% of revenues come from the Eurozone) and the high importance of the financial and commodity stocks is exactly the exposure you want to have when you expect higher inflation and rates.
Regarding the US economy, it is moving forward and the stimulus checks and increased mobility is leading to higher spending (e.g. retail sales in January), while excess savings continue to grow. We expect the March fiscal package to be $1-1.5 Tr, bringing the total stimulus figure to $5 Tr. CPI (consumer price index) and PPI (Producer Price Index) data suggest there is upside to inflation estimates (we estimate 2.5% core inflation in the spring). We also highlight the spectacular 4Q operating leverage, with revenues growing 4.5-5% YoY and EPS in double digits and all this in the midst of a recession and lockdown.
