Market: Europe in the shadow of the USA, Pictet AM's opinion

(CercleFinance.com) - On Monday, December 2, Christopher Dembik, Investment Strategy Consultant at Pictet AM, commented on the economic decoupling between Europe and the USA, as Europe is going through a phase of economic vulnerability, marked by both cyclical and structural problems.


In Germany, a symptom of this phenomenon is that almost one in two manufacturing companies is struggling to fill its order books - a level comparable to that of the 2008 crisis. There really is a problem in terms of macroeconomic dynamics", stresses the analyst.

The political situation also remains tense in several economies in the European zone. Pictet believes that several governments or coalitions in power could bear the brunt of these tensions, notably in France, Germany, Spain and the Netherlands.

' We finally have a combination of political instability next year in these countries, and this does not seem to have been fully 'priced in' by the financial markets, and particularly by investors", believes Pictet's expert.

On the other hand, the asset management bank believes that the thorny issue of tariffs between Europe and the United States should not play a decisive role. Chistopher Dembik believes that "even if discussions and a tug-of-war could arise, this should not have a perceptible macroeconomic impact".

For him, the only unknown factor is the exchange rate. Approaching euro/dollar parity - which is not our central scenario - could well be an aggravating factor in negotiations with the United States".

In this respect, the euro's fall of almost 3% against the dollar in the space of a month clearly reflects the performance differential in interest rates and equities between Europe and the USA. This phenomenon is further amplified by investment flows out of Europe and into the USA.

Against this backdrop, "it's hard to be positive on Europe", given the continued dominance of the major US stocks, notably the "Magnificent Seven" [i.e. Alphabet, Amazon, Meta (ex-Facebook), Apple, Microsoft, Nvidia and Tesla], which outstrip the entire European stock market in terms of capitalization.

The economic performance of the United States is part of a long-term trend: "Over 10, 20 or 30 years, US equities systematically outperform European equities", notes Pictet.

The investment bank therefore recommends that investors focus on the US market, where yields remain attractive, while the Paris stock market, dominated by the luxury goods sector (around 30%), is coming under increased pressure, notably from the upmarket Chinese products.

Finally, Pictet is keeping a close eye on emerging market debt, where the level of debt is sometimes "quite sustainable" and can offer yields close to 7%.

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