However, an important consideration is what part of the world is generating this forecast improvement. Figure 1 above left splits IMF world growth forecasts into advanced versus developing economies. In the 25Y run up to the Great Recession, the average for developing economies was around 4.5% versus the IMF's forecast for the next 6Y of almost 6%. For the same periods advanced economies are expected to weaken from 3% to just 2.3%, respectively.
So while the world in aggregate should be stronger over the next few years, if we and the IMF are right, it might not feel like that for advanced economies – particularly those in Europe. Take the European Union for example – exportsare highly targeted towards other advanced economies. According to the IMF's Direction of Trade database, in 2011 around 75% of EU goods exports went to advanced economies versus 25% to emerging economies. But which countries in the EU could benefit more/less from stronger growth in EM as a result of higher direct trade exposures?
Within the EU Belgium, the Netherlands, Luxembourg, Ireland, Denmark and Norway stand out as having particularly low exposures to developing economies – with the proportion of goods exports to EM sub-20% (and, in the case of Ireland and Norway, below 10%). The UK is at the higher end of this group but still below the EU average at a little under 20%. Those with higher exposures include Germany, Italy and Finland, all around the 30% mark (Greece stands out with an even higher proportion due to exports to Central & Eastern Europe). However, the EU figures are dwarfed by the US, which - on account of its sizable exposure to LatAm - has a far more favourable balance between DM and EM goods exports (55%/45%). Japan and Australia have similar exposures thanks to their proximity to Asian markets.
Eoin Treacy's view European companies spent much of the decade
from the Euro's inception expanding within the currency union; seeking to build
Pan European operations. The 15-month and counting recession in the Eurozone
has weighed on that strategy and companies with more globally oriented business
models have tended to outperform.
If the region is to grow its way out of its debt issues an aggressive growth strategy will need to be adopted. It is therefore noteworthy that European Commission President Jose Manual Barroso highlighted the failure of austerity to promote growth in a speech he delivered yesterday. If the Eurozone changes focus, related stock markets should respond favourably.
The Deutsche Bank Euro Trade Weighted Index retested its 2003 lows in July last year and has since rallied to test the almost five-year progression of lower rally highs. It found support in the region of the 200-day MA at the beginning of April and a sustained move above 130 would be required to check the medium-term downward bias.
Following a tumultuous few years, European equity valuations have improved. For example Volkswagen has an historic P/E of 3.16, forward P/E of 6.62 and yields 2.42%. The share hit a medium-term peak near €187 in early February and has returned to test the upper side of the 2010 through 2012 range near €140. It bounced from that level area today and a sustained move below it would be required to question potential for additional upside.