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Europe Insights March 2020
update: 19.03.2020
Monthly update on European markets
Europe: broad sweeping measures to stem the COVID-19 crisis
The European governments have been scaling up their policy responses to combat the COVID-19 propagation (see figure
1). Spain and France have followed Italy in imposing a shutdown on their populations, and this for an initial period of 15
days. In Germany, the government has imposed among other measures, the closure of all non-essential shops, schools and
day-care centers. Elsewhere in Europe, governments have gradually implemented social distancing measures, or are now
considering drastic national shutdowns. Confinement measures to protect the health of the population will likely last more
than one month. Although probably not available before next year, a vaccine, when announced, could dramatically restore
business confidence.
Uncertainties over the economic impact
In the short term, the priority for the governments is to mitigate the impact of confinement and travel restrictions on
businesses, which are now causing a massive supply-side shock on the economy. According to the European Commission
(EC), the shock to the eurozone economy could lead to a GDP contraction in 2020, with a substantial but not complete
rebound in 2021. For comparison, the 2008-2009 financial crisis led to a GDP loss (in real terms) of 4.5% in the eurozone,
and the Euro debt crisis caused another shock, close to 1% GDP over 2012 and 2013.
There will certainly be an economic contraction this year, and it will likely be deeper than the financial crisis. There are four
key metrics that are likely to be important determining factors for the severity of the recession: How quickly and how widely
COVID-19 spreads through major economies? How disruptive the containment measures taken by authorities are? Whether
labour markets deteriorate substantially? and Whether financial systems will be compromised?
Figure 1. Confirmed COVID-19 cases in selected countries
From mid-March
Covid-19 cases Start of confinement
30 000 or social distancing
measures in
25 000 Spain, France,
Germany,
20 000 US, UK
15 000
10 000
Italy: February 23th
Started confinement
5 000
0
US Spain UK France Germany Greece South Korea Italy
Source: Bloomberg - Data as of 16 March 2020
This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and
does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment
research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any
prohibition on dealing ahead of its dissemination.
Non contractual document. For
Professional Clients and
Institutional Investors Use Only.Europe: broad sweeping measures to stem the COVID-19 crisis (contd.)
Ramping up policy responses
Despite the dramatic rise in the COVID-19 cases in Italy over the past three weeks,
European governments have been acting very gradually. The first series of measures
The policy responses
came in Italy at the end of February, followed by Spain, France, the UK and the US.
focus on helping
The policy responses focus on helping firms to manage their financial liquidity positions.
firms to manage their Announced measures so far have included state loan guarantees to businesses, and
financial liquidity various support schemes for firms and employees (see Table 1). For instance in Spain,
positions. firms will get loans from the state-owned ICO bank, similar to those put in place during
On March 12th and the 2011-13 credit crunch. Also in Germany, the government has reactivated the
19th, the ECB reduced-hours subsidy scheme (Kurzarbeitergeld) until end-2020 - a scheme that was
first experimented in the 2008-2009 crisis.
unveiled a set of
State loan guarantees and fiscal support will address firms and households’ liquidity
additional easing
risks. At the time of writing, the fiscal support as of % GDP is estimated between 0.5%
measures, including (Germany) and 1.9% (France), not including state loan guarantees. Meanwhile, on
a boost of its APP to March 12th and 19th, the European Central Bank (ECB) unveiled a set of additional
its highest ever easing measures, including a boost of its Asset Purchase Program (APP) to its highest
ever pace (see Data Watch p.4).The new Pandemic Emergency Purchase Program will
allow bond purchase deviations in terms of size and flexibility in allocation over time.
A minimum coordination at the European level
Businesses and governments were not prepared for a pandemic and health emergency
EU members agreed risk, so a policy coordination at the European Union level has proved impossible to
emerge rapidly.
to mobilize €37bn for
The EU members, however, agreed to mobilize €37bn for the health crisis, under the
the health crisis
regional funding programs. The EC also announced that, given the severe economic
downturn, European governments would be able to increase public spending, under the
so-called flexibility clauses attached to the EU budget rules. Discussions are still under
way for a coordinated EU-wide fiscal stimulus package. It remains to be seen whether, in
this emergency health crisis, the EU governments will find a consensus around a new
stabilization framework. In the aftermath of the 2010-2012 Eurozone debt crisis, the EU
authorities set up the €500bn European Stability Mechanism (ESM), with emergency
credit lines against a memorandum for stringent policy adjustment. The ESM is designed
to rescue a few countries, not a whole region.
Table 1. Policy measures announced by the governments
Mobilized
Country Policy Measures %GDP
funds / costs
• Loans available for all companies, mostly provided by KfW, the state development bank up to €550bn
• Export credits and other guarantees for companies
Germany • Corporate tax deferrals
0.5%
• A government subsidised scheme for reduced-hours workers to avoid a peak in unemployment €8bn (E)
• A regional fund launched in Bavaria to buy stakes in companies under stress €10bn
• State guarantees for bank loans to businesses €300bn
• Mechanism to compensate temporarily laid-off workers
• Fiscal support to affected companies and employees
France
• Rescue package of companies with state shareholdings €45bn 1.9%
• Deferrals of corporate tax and social security payments
• "Sick leave" for workers who have to stay home to look after their children due to schools 'closures
• Fiscal rescue package
• Funds for the health system and the civil protection agency
• €500 / person for the self-employed, fiscal support for companies paying redundancy payments, a
Italy freeze on any worker lay-offs, and a cash bonus for Italians still working during the lockdown €25bn 1.4%
• Moratorium on loan and mortgage payments
• Financial support for families with children at home, taxi drivers and postal staff who continue to work
• Financial support for national airline company
• State loan guarantees €100bn
• Initial package of measures including health spending €4bn
Spain
• Tax relief for SMEs and self-employed over 6 months €14bn 1.6%
• Credit lines for the tourist sector and extended social security subsidies for seasonal workers €0.4bn
Sweden • Support package KR300bn 6.2%
• Loan guarantees to businesses £350bn
UK
• Fiscal support £20bn 0.9%
Sources: European government websites as of 18 March 2020 – (E) Estimated
The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information
available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not
be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. The content of this page
is not intended as an advice or recommendation to buy or sell any sector or financial instrument. Any forecast, projection or target where provided is indicative only
and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.
Non contractual document.
2 For Professional Clients and
Institutional Investors Use Only.European Equity. What do valuations tell us about a market bottoming?
At 18 March, the market was down 35.5% from the high in February. Only
valuations can tell us how much further the market could go. Valuations have a floor
even during the worst crisis and pandemics. A powerful valuation metric is the CAPE-
Cyclically Adjusted Price to Earnings ratio created by Yale academic Robert Shiller. It
Valuations have a floor helped to predict the dotcom crash, the 2008 crash and the 2018 downturn. Since 1872,
even during the worst the Shiller PE for the US market has ranged from 5X in 1921 to 44X at the height of the
crisis and pandemics. internet bubble. The four other recorded highs are 30X in 1929, 27X in 2008 and 33X in
Based on 2009, the September 2018. The data for Europe available since 1935 ranges in a similar band
from 6X to 40X.
Shiller PE for the US
and Europe could Fortunately, the European market is now quite cheap on this measure; 13X on 18
reach 13X and 10X March. Unfortunately, the US market is still expensive at 22.4X. This matters because a
respectively, leaving further correction in the US market would surely continue to bring down Europe. If 2009
Europe 23% below is any guide, the Shiller PE for the US and Europe could reach 13X and 10X
respectively, leaving Europe 23% below today’s levels.
today’s levels
One reason why most market commentators were totally caught off-guard by Covid19 is
due to the relatively mild market impacts of previous pandemics with terrible death tolls:
Spanish flu of 1918-19, (50 million deaths), Asian Flu of 1956-8 (2 million deaths), 1968
Flu Pandemic (1 million deaths). SARs, surprisingly, had one of the biggest market
impacts even though it only resulted in 774 recorded deaths. That is because the
European market was already very overvalued when SARS came along. The pandemic
simply nudged it down below its 35-year average valuation. During the 1918-19
pandemic, the Shiller PE remained stable at around 6X even when the virus mutated
into its second and deadliest wave.
Levels of 13X on 18 March clearly seem low in light of medical advances and work from
home policies. In 1919, the mayor of New York mandated different opening hours for
business so that the subways would not be congested: a reasonable policy at the time
but not as effective as not going to work at all.
Figure 2. Stock market declines vs. Shiller PE valuations
130
120 PE 19.4x
PE 22.7x
110 PE 6.6x
100
PE 6.1
while new &
90 deadliest
wave hits
80
70 PE 16.8x
PE 13x
60
Day-1
8
15
22
29
36
43
50
57
64
71
78
85
92
99
106
113
120
127
134
141
148
155
162
169
176
183
190
197
204
211
218
225
232
239
246
253
260
267
274
281
288
295
302
309
316
323
330
337
344
Europe (COVID-19) Europe (Sars - 2002-03) US (Spanish Flu - 1918-19)
Sources: Factset for returns and Shiller for Cyclically Adjusted PE ratios www.econ.yale.edu-shiller/data.htm - Data as of 18 March 2020;
www.mphonline.org/worst-pandemics-in-history
The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns.
The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information
available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not
be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Any forecast, projection
or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such
forecast, projection or target. Allocation is as at the date indicated, may not represent current or future allocation and is subject to change without prior notice.
Non contractual document. For
3 Professional Clients and
Institutional Investors Use Only.Data watch as of 19 March 2020 Improved or better-than-expected
Worsened or below-expectations
Unchanged or in line with expectations
F: Final A: Advanced P: Preliminary estimate
Data Last Previous
Economic Indicator Consensus Analysis
as of data data
The eurozone Composite PMI picked up to its highest
level since August 2019, driven by services and
manufacturing output. Although remaining weak, the rate
of expansion improved for a third straight month despite
PMI composite Feb P 51,6 51,0 51,3
signs of demand and production being dampened by the
coronavirus outbreak and disruptions in supply chains.
Service sector activity continued to rise despite some
reports of lower tourist numbers
Eurozone GDP growth softened to 0.1% qoq in 4Q, at its
weakest pace since 1Q 2013, after an upward revision to
3Q (0.3% qoq from 0.2% initially). For 2019, GDP growth
was 1.2%, down from 1.9% in 2018. Cross country,
GDP growth QoQ 4Q F 0,1% 0,1% 0,3% unexpected contractions in France (-0.1% qoq) and Italy
(-0.3% qoq), and a flat GDP in Germany were key drags
on eurozone activity. Meanwhile, Netherlands, Spain and
Portugal overperformed, with GDP growth at,
respectively, 0.4% qoq, 0.5% qoq and 0.6% qoq in 4Q
Eurozone industrial production contracted less than
expected in January, ahead of the virus outbreak.
Industrial production % YoY Jan -1,9% -2,9% -3,6%
Confinement measures starting in March will however
cause significant disruptions in the coming months
The unemployment rate held steady at 7.4% in January
as expected, for the fourth consecutive month, and at its
Unemployment rate Jan 7,4% 7,4% 7,4%
lowest level since May 2008. The labour market had
remained strong before the global spread of coronavirus
The trade surplus has steadily increased since
Trade balance (goods, ex
September, due to slowing imports, reflecting a softening
EMU)
Dec P 225,2 222,3 217,9 domestic demand. On a 12-month cumulative period,
EUR billion (12Mth
Eurozone imports have only risen by 1.5% yoy on
cumulative)
average, while exports have increased by 2.7% yoy
Eurozone retail sales continued to slow (at 1.9% yoy on
average over a rolling 3-month period), against a pace of
2.2% yoy on average in 2019. Eurozone retail sales are
Retail sales % YoY Jan 1,7% 1,1% 1,7%
expected to contract over the next few months, as drastic
confinement measures have been implemented across
the region
Inflation Lower energy prices during the month accounted for
much of the decline in headline inflation. Global demand
- Headline CPI, % YoY Feb P 1,2% 1,2% 1,4% for oil has fallen following the coronavirus outbreak in
China, weighing on energy prices. Eurozone core inflation
- CPI core*, % YoY 1,2% 1,1% edged slightly higher to 1.2% yoy, remaining in its 0.6%-
1,2% 1.5% range observed since 2013
ECB Refinancing rate The ECB announced a comprehensive monetary policy
easing package. This includes : (i) a new, temporary
0,0% 0,0% 0,0% programme to provide cheap loans to banks until June
2020; (ii) more favourable terms to be applied to the
existing targeted longer-term refinancing operations by
12 March offering loans to banks below the ECB’s deposit rate of -
Deposit rate 0.50%; and (iii) a boost to its asset purchase programme
-0,50% -0,50% -0,50% by EUR120 billion until the end of the year (EUR33
billion/month), with a strong contribution from private-
sector assets, in addition to its existing commitment to
buy EUR20 billion a month
In response to the Covid-19 crisis, the ECB added another €750bn in its Asset Purchase
Pandemic Emergency Program, its highest ever pace of purchases. The ECB also decided to expand the range of
18 March
Purchase Programme assets eligible for purchase to non-financial commercial paper and to ease its collateral standards
to allow banks to raise money against more of their assets, including corporate finance claims.
* Eurozone Core CPI is CPI excluding energy, food, alcohol & tobacco
Sources: Bloomberg, HSBC Global Asset Management, as of 19 March 2020.
The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information
available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not
be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Any forecast, projection or
target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such
forecast, projection or target.
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