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Key
Points
- France and
Germany have both
emerged from recession
- Both reported
0.3%
quarter-on-quarter growth in 2Q 09, better than consensus expectations
- Germany’s
record 1Q
09 contraction revised upwards from -3.8% quarter-on-quarter to -3.5%
quarter-on-quarter
- Leading
indicators have
bottomed and are turning up
- Valuation for
European market
undemanding, maintain our 3.0 star “attractive” view
Better-than-expected
GDP growth
Germany and France jolted
European
markets with positive growth shocks, each reporting a 0.3%
quarter-on-quarter growth in the second quarter of 2009. According to
consensus estimates by Bloomberg, Germany’s economy was
expected to shrink by 0.2% from the previous quarter, while the French
economy was forecast to contract by 0.3%.
After contracting for four
straight
quarters, the German economy has finally emerged from a long-drawn
recession with positive 0.3% quarter-on-quarter growth. Also, the
contraction in 1Q 09 was revised from a record 3.8% to a slightly
milder decline of 3.5%. A change in fortunes for the largest economy in
Europe is a positive development for the rest of the Euro-zone, which
is widely seen as a region of weak growth. Recent OECD estimates were
for a 4.8% contraction in the Euro-zone GDP in 2009, with zero growth
in 2010, but with the latest data, estimates are likely to be revised
upwards.
Similar to the German
economy, the
French economy has contracted for four consecutive quarters, with the
latest 0.3% quarterly growth taking France out of a recession. GDP was
boosted by increased exports of automobiles while domestic demand held
up strongly.
Leading
Indicators show improving conditions
Two
important leading indicators we observe have turned up (see Chart 3),
with the German ZEW Survey spiking up to 44.8 in June, the highest
since May 2006, before falling slightly to 39.5 in July. The latest
figure for August (to be released on 18 August 2009) is expected to
show an improvement to 46.5. Also, the OECD Europe leading indicator
has been rising for 5 straight months since bottoming in January 2009,
which should be a positive indicator of improvements in the overall
Euro-zone economy in months to come.
Valuations
undemanding
As
at 14 August 2009, the European market (as represented by the DJ Stoxx
600 index) has gained 16.2% year-to-date in EUR terms, and has risen
45.9% since bottoming out on 9 March 2009. Despite the strong rebound,
valuations remain undemanding with the market trading at an estimated
PE ratio of 12.5X and 10.6X based on forecast 2010 and 2011 earnings.
The current market dividend yield of 3.8% is also higher than the
five-year average dividend yield of 2.7% between 2002 and
2007.
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