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At last, the bears get to say “I told you so.”
Strategists have been forecasting for months that European equities would lop off some of this year’s rally but their prediction didn’t come true until May. Shaken by the flare-up in the U.S.-China trade spat, the Stoxx Europe 600 Index is set for its first monthly retreat of 2019, breaking the longest winning streak in almost two years.
And it might get worse, if the forecasters are right.
According to the average response in a Bloomberg poll, the Stoxx Europe 600 Index is likely to fall 5.4% from Thursday’s close, to 362 points, by the end of 2019. The Euro Stoxx 50 Index, home to the region’s biggest companies, will drop 4.7% to 3,278, according to survey estimates.
Analysts remain pessimistic even after recent declines: trade wars are only adding to the region’s woes of spotty economic data and messy political developments in the U.K. and Italy, where the country’s Deputy Premier is challenging European fiscal rules. Being short European equities is one of the most popular trades globally, according to the Bank of America (NYSE:BAC) fund manager survey, and Sanford C. Bernstein strategists last month said the region is “uniquely hated.”
State Street (NYSE:STT) Global Advisors, which oversees $2.8 trillion, agrees with the consensus.
“We’re definitely staying underweight European equities. I definitely don’t think it’s time to buy. The economy isn’t strong, you have political and growth concerns in Germany, Italy, the U.K.,” said Altaf Kassam, EMEA head of strategy and research at State Street.
And to think things were going so well just a few weeks ago. At the end of April, the Euro Stoxx 50 was less than 1% away from entering a bull market, while Societe Generale (PA:SOGN) SA recommended European small-caps and automakers. That last call in particular hasn’t aged well, with carmakers this month tumbling the most among industry groups.
The Stoxx Europe 600 Index was set for a weekly gain of 0.7% as Trump announced a delay in imposing tariffs on imported vehicles from the European Union.
Earnings expectations for European companies briefly turned positive last month, but in May profit downgrades have once again been outweighing upward revisions, according to the Citigroup (NYSE:C) index.
For a table on the Stoxx 600 and Euro Stoxx 50 surveys, click here
(Updates with the weekly move in the ninth paragraph.)