Since the start of March, five interest rate hikes have been implemented as part of the US Federal Reserve’s counter-inflation measures to slow down the economy. The Bank of England also carried out five consecutive interest rate hikes of 25 basis points (bps) and 50 bps for the first time in August. The European Central Bank only began its first rate hike in July. The latest effective rates of the central banks are shown in Chart 1.
The Consumer Price Index (CPI) is used to track the prices of goods and services over time, measuring inflation on monthly consumer price changes. The CPI is at its highest since June, mostly affected by the food and energy prices. The latest CPIs in three different regions are shown in Chart 2.
With the rising interest rate hike, the US is said to have “peaked” in the month of June, while the UK and EU are still holding back on extensive rate hikes to prevent a stagflation. As seen from Chart 2, the UK CPI is the highest among the three regions, while the US CPI is at the lowest after extensive rate hikes. The EU and UK CPIs are expected to remain higher than the US CPI, unless both the EU and UK hike extensively to curb energy and food inflation.
Taking advantage of weaker currency
Within the European market, the British pound (GBP) showed its weakness, tumbling 13.32% ytd against the Singapore dollar (SGD). Likewise, the euro (EUR) fell 8.81% ytd against the SGD and even reached parity against the US dollar (USD) on July 12 and Aug 23, as European inflation worsened with food and energy prices soaring.
With the weakening of the foreign currency, European stocks’ prices are now discounted compared to their values six months ago. Before the start of the UK rate hike in February, GBP was at a spot rate of 1.8504 GBP/SGD on Jan 13. Currently, the spot rate for GBP/SGD is at 1.5879 (see Chart 3), which means goods are now cheaper by $262.5 for every GBP1,000 spent.
Similarly, EUR/SGD peaked around 1.544 on Feb 14, but is now at 1.3942 (see Chart 4), which translates to the fact that for every EUR1,000 spent, $149.8 is discounted. All that aside, a weakening currency is not all bad for a region or country; a weaker currency helps to boost exports by making them more affordable. This may then help to enhance economic growth and jobs as importers increase profits.
The European market or Eurozone exports continue to rise in value (see Chart 5). In June, German exports grew 4.5% while hitting a record high, reaching a trade surplus of EUR6.4 billion. Eurozone gross domestic product and employment rate also expanded despite this high inflation period. Thus, economic data continues to indicate recovery of the economy.
With the UK and EU implementing gradual rate hikes to prevent a stagflation, both the GBP and EUR are likely to strengthen over time with more interest rate hikes. Thus, it is a very favourable time to take advantage of the weakened currency.
Actively traded stocks in the European market
Amid energy crisis and recession fears, here are some stocks within the European market that are actively traded and have potential to grow in the current environment:
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BP’s most recent earnings tripled amid the rising energy prices, and proceeded to raise its quarterly dividend. In this challenging energy industry, BP shifts its focus towards renewables while cutting on some of its assets.
Having doubled in profit during this energy market volatility, Glencore has its grips on the coal market as natural gas turns scarce. Glencore is expected to take advantage of the market volatility till supplies return to normal.
Based in Amsterdam, ING provides banking services such as mortgages, business lending and savings accounts. ING managed to beat estimates despite its shrinking business in Russia. With the EU rate hike, ING is likely to profit from this movement unless consumer confidence decreases.
It is the largest telecommunications provider in Europe by revenue. Beating second-quarter estimates, it has raised its earnings forecast for the second time. Deutsche Telekom is looking to increase its business as it rolls out its 5G services after a merger with Sprint.
Known as the second largest listed bank in France, Credit Agricole reported that its profits doubled in the second quarter of 2022. EPS was US$0.22 higher than estimated, boosting its share price to EUR10.06. Credit Agricole is also looking to expand its businesses in Italy as it sees strong potential for growth.
Table 1 shows the consensus ratings and average ratings of all analysts updated on Bloomberg in the last 12 months. Consensus ratings have been computed by standardising analysts’ ratings from a scale of 1 (strong sell) to 5 (strong buy). The table also shows several analysts’ recommendations to Buy, Hold or Sell the respective stocks, as well as their average target prices.
POEMS European market and market hours With all the analyses shown in this article, it is fair to say that there is much potential in the European market for further development and opportunities. This is where our services at POEMS can come in handy to help you achieve a better foothold and give you a headstart in your trading journey. By trading on POEMS, clients have access to various exchanges in Europe (see Table 2).
With trading in the European market starting as early as 3pm Singapore time (SGT) on POEMS, investors from Singapore can trade earlier between Singapore/Hong Kong/ China closing market trading hours and the US opening market trading hours. Markets are available for trading from Monday to Friday. For more information, do visit POEMS’ website or contact us to reach our experienced representatives for help.
Thng Xiao Xiong is UK equity dealer, Phillip Securities’ Global Markets Desk and Support