European stock market and funds review – eurozone inflation drops more than expected

2023 has been a tough year for many economies. Higher inflation and rising interest rates mean the cost-of-living crisis is hurting many. The ongoing invasion of Ukraine and the devastating Israel-Hamas war is also impacting both livelihoods and sentiment.

All of this has increased the risk of recession in some regions and the eurozone has already teetered on the brink.

Official figures showed the eurozone economy contracted by 0.1% in the three months to the end of September 2023. Higher interest rates, declining consumer spending, weaker exports, and recession in Germany, have all fuelled slow growth.

On top of this, the European Commission lowered its growth forecast for the eurozone economy from 1.1% to 0.8% in 2023, and 1.6% to 1.3% in 2024.

So, while the economy is still forecast to grow, it’s expected more slowly. A small rebound in growth is expected next year, if inflation keeps falling, unemployment rates stay low, and wages recover.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Will the European Central Bank cut interest rates?

Higher inflation has meant higher interest rates in a lot of global economies. But recent inflation figures in the eurozone fell more than expected – from 2.9% in October to 2.4% in November, the slowest annual pace since July 2021. This came in below expectations of 2.7% and closer to the 2% target.

The fall was mainly a result of lower energy prices – though energy prices can be volatile, and other key measurements of inflation, like food, were higher.

This calls into question the European Central Bank’s (ECB) view that inflation will be higher for longer. While the ECB was saying it won’t lower rates for some time, there’s now talk that rates could be cut as early as spring 2024.

Like a lot of economies, a balance is needed – keep rates high and risk pushing the economy into recession, or cut rates and risk keeping inflation high.

Christine Lagarde, President of the ECB, recently warned the war against inflation isn’t over. Lower levels of unemployment and wage pressures could add to spending and inflation. The Organisation for Economic Co-operation and Development (OECD) doesn’t think the ECB will start cutting rates until 2025.

If anything, it’s a reminder just how difficult it is to forecast economies. And there are a lot of countries in the eurozone, each with their own rate of inflation and growth expectations.

Investors should still take longer-term views and maintain balanced and diversified portfolios.

How have the European stock markets performed?

Even with gloomier economic news, European stock markets have generally performed well over the past year (to the end of November 2023).

Over this time, the broader European stock market, according to the MSCI Europe ex UK index, has grown 9.96*. On the other hand, the broader global market, the MSCI AC World index has grown 5.90%. But remember, past performance isn’t a guide to future returns.

One of the drivers behind this has been interest rates. When rates were low, investors flocked to ‘growthier’ tech giants in markets like the US, but as rates and borrowing costs climbed, these companies struggled.

Value companies, ones thought to be trading at a discount or undergoing a turnaround, became popular again. As Europe is considered more of a value-orientated market than the US, investors have taken advantage.

Looking at individual countries, three markets led the stronger growth – the Danish, Italian and Spanish markets, up 28.10%, 26.59% and 25.59%, respectively.

Danish pharmaceutical company Novo Nordisk, which makes up a big part of its market, performed very well thanks to the popularity of its diabetes drugs in the US. Elsewhere, banks have helped markets in Italy and Spain, as rising interest rates have boosted profits.

European smaller companies haven’t performed as well as bigger companies over the year. This is partly because smaller companies tend to rely more on their domestic economies for success. And this has hurt during a year where sentiment towards Europe and its rate of growth has been lower.

Larger, more-established companies are also more likely to make a bigger portion of their profits internationally.

How have European Wealth Shortlist funds performed?

All European Wealth Shortlist funds have delivered a positive return over the past year, though the level of performance is mixed. We usually expect this. A range of managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

Remember, past performance isn’t a guide to the future, and performance here is over a short time. All investments fall as well as rise in value, so you could get back less than you invest.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.