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In a weekly report published on 12 April, Dhaval Joshi, senior vice president and chief European investment strategist at BCA Research said ‘the 10% undervaluation of the euro will eventually correct’. The team has outlined three structural investment opportunities:
- The yield shortfall on German long-dated bunds versus the equivalent US T-bonds and UK gilts will narrow, one way of the other.
- It follows that the 10% undervaluation of the euro – as calculated by the European Central Bank (ECB) itself – will eventually correct.
- As the euro area’s structural overcompetitiveness gradually corrects, the decade-long outperformance of consumer goods exporters versus consumer services will reverse, especially in Germany. Overweigh German consumer services versus consumer goods exporters.
BCA’s Joshi says there is a bit of deceleration in European growth, but it is hard to say whether it is serious, or just a minor wobble at this stage. In the medium term, he says he is optimistic towards Europe compared with the rest of the world, and that there is no real inferiority in Europe compared with other major economies.
In terms of the European inflation picture, Joshi says that the reason why Europe appears to be behind the US in terms of growth in prices is down to calculation methodology. He says that definitions of consumer prices in the euro area and the US are quite different.
‘The euro area’s harmonised index of consumer prices (HICP) excludes the consumption costs of owner-occupied housing, whereas the US consumer price basket includes it at a very substantial 25% weight’.
Stripping out housing, Joshi said ‘there would be no difference whatsoever’.
Looking at the bond market, Joshi believes the spread between German long-dated bunds, and US or UK bonds will narrow. To trade this, he suggests being short on German bunds versus long US treasuries in the futures market. The justification for this trade is that the ECB is ultra-accommodative, yet the economy has been growing and the central bank will start to unwind policy.
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