Market Musings 091223: Breakouts

Market Musings 091223: Breakouts

Stock market momentum maintained into December

Summary

• European stock markets break to new multi-year highs

• Italy, Spain, Germany in the lead

• Leading sectors: Insurance, Banks, Tech, Retail

Europe breaks out, other markets hesitate

As we edge towards the Santa rally period (December 11 - January 5), it is a good time to step back and identify the current momentum winners.

The UK stock market may have suffered less than other markets in 2022, but it continues to languish in 2023 with the FTSE 100, 250 and AIM indices all exhibiting a clear lack of momentum.

In contrast, the eurozone displays relatively robust upwards momentum in site of the lack of economic growth in Germany, France and elsewhere in the 27-country union.

Just look at the following list of national stock markets that have not only done well over November, but that also break new multi-year highs along the way.

Within the eurozone, Italian (FTSE MIB index), Spanish (IBEX 35) and German (DAX index) large-caps have all continued their steady ascent since late 2022, in the process breaking new multi-year highs along the way.

Italian stocks lead over 2023

Source: tradingview.com

At a European sector level, Financial stocks (insurance companies, banks) have led the way, helped by higher short- and long-term interest rates which have boosted their profitability.

European Insurance, Bank sectors lead

Source:tradingview.com

Remember - the chart above only shows price returns. For the full picture, we should then also add the impact of dividends paid out over the year, which then adds another 5-6% in income return.

It also pays to zoom out to see the longer-term chart, which is somewhat less impressive.

Euro STOXX 50 and Euro Banks still watching up to 2007 pre-Financial Crisis highs

Source: tradingview.com

Which stocks out of the Euro Financials sectors are leading?

• Italy: Intesa SanPaolo, Unicredit, Generali

• Spain: Santander, BBVA

• France: AXA, Credit Agricole

• Germany: Munich Re, Hannover Re

Aside from Banks and Insurance, two other leading sectors are Technology and Retail.

We should not be surprised at the strength of European Technology stocks, given the stellar performance of the US tech mega-caps in the Magnificent 7.

SAP and semiconductor names ASML, BESI, and ASM all stand out. We should also mention ST Micro and Infineon, which are also looking relatively strong. While not yet back at the mid-2021 highs just yet, they look on course to return to this lofty peak sooner rather than later.

European Tech rallying back

Source: tradingview.com

One important note on certain of these semiconductor names like STMicro and Infineon - they are far cheaper than equivalent US names, trading at under 12x and at 15x P/E.

This last sector is perhaps more surprising: European (non -food) Retail, including the likes of Inditex (Zara), H&M, NXT Next, and MKS Marks and Spencer.

Retail sector momentum defies consumer gloom

Soure: tradingview.com

Conclusion

Despite a lack of economic growth in Europe and weakening economic momentum in the US, European stocks look well-positioned to make further gains in this seasonally strong period of the year.

I personally would focus more on sectors and indices that remain relatively cheap versus history and which are showing strong price momentum trends - Italy, Spain, Insurance, Banks, Semiconductors.