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Europe Economic Outlook of the Week
ECONOMIC OVERVIEW
France to lift restrictions for EU10 workers
• France will lift restrictions for employees from the 10 new European Union (EU) member states in July.
• However, Citi analysts do not expect a huge inflow of EU10
workers to France, hence this is unlikely to have a dampening impact on euro area wages.
• In the view of Citi analysts, even without meaningful structural reforms, euro area wage growth is unlikely to accelerate
because of the economic slowdown and rising unemployment.
EQUITIES
Positive on companies with pricing power,
earnings resilience and robust balance sheets
Week ending June 20, 2008:
CAC: -3.70% DAX: -2.76% DJ Euro STOXX: -3.82%
• In the view of Citi analysts, slowing growth and rising inflation have raised concerns over stagflation which could potentially hurt equity returns.
• However, valuations appear attractive for European equities in the view of Citi analysts, and according to historical data, defensive sectors such as Healthcare, Food & Beverage tend to be more resilient in past periods of stagflation.
• Nevertheless, Citi analysts are positive on companies with
pricing power, earnings resilience and robust balance sheets
that have historically been reasonable inflation hedges.
FIXED INCOME
Turning more cautious on Euro government
bonds
As at June 20 vs. June 13, 2008:
2-yr Eurobond: 4.61/4.62 5-yr Eurobond: 4.67/4.66
10-yr Eurobond: 4.63/4.62
• The recent sell-off in short term Euro-government bonds
appear to be overdone. Citi analysts are maintaining their
expectation for interest rates to fall this year, albeit only gradually and to a limited extent.
• For investors desiring exposure, Citi analysts prefer the 2- to 3-year maturities on a slower growth scenario.
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