Thomas McGarrity, head of equities at RBC Wealth Management, discusses how the European equity markets have performed at the start of 2023 and the firm’s expectations for specific sectors over the next 12 months.   

European equity markets have started 2023 on the front foot, with the STOXX Europe 600 ex UK Index gaining more than 3.5 per cent in euro terms (+1.8 per cent in dollars). The repopeng of China's economy bodes well for select equities, Thomas McGarrity, head of equities at RBC Wealth Management said.

Prominent gainers included stocks exposed to China's loosening of covid controls. McGarrity thinks stocks and sectors well-placed for China’s reopening over the next 12 months, such as luxury goods firms, offer attractive opportunities for investors within European equities this year.

“A short-selling squeeze also appears to be taking shape in the early trading days of 2023. Many of 2022’s worst-performing stocks, as well as companies with an elevated amount of shares out on loan (a signal of short interest), have seen their shares rally 10 to 20 per cent,” he continued. This technical, rather than fundamental, dynamic is unlikely to have legs beyond the very short term, in his view.

McGarrity, like his peers, is trying to figure out the impact of China's removal of harsh zero-covid controls that had been in place for months. China is an important export market for countries such as Germany.

Inflation
Inflation data in Europe appear encouraging, he said. The December year-over-year inflation rate fell to 6.7 per cent in France, 8.6 per cent in Germany, and 12.3 per cent in Italy. Consensus expectations for December have inflation in the euro area as a whole below 10 per cent for the first time since August, McGarrity said.

“Inflation has declined thanks to energy prices, which have retreated in recent months. With natural gas storage near capacity, unusually mild weather has made it possible to reduce consumption, lessening the pressure on energy prices,” he continued.

Despite these better numbers, he believes that the European Central Bank is still likely to worry about underlying price pressure as inflation remains much above its 2 per cent target. After December’s hawkish ECB meeting, RBC Capital Markets increased its peak interest rate estimate for 2023 to 3 per cent from 2.5 per cent.

In the UK, retail bellwether Next announced that sales for the Christmas period were above consensus expectations, enabling the company to upgrade its full-year profit guidance, he said. The company’s stock gained more than 7 per cent following its statement, and the broader retail sub-sector was buoyed by hopes that other UK retailers could also have generated sales above consensus expectations through the holiday season.