20180611-NATIXIS-Euro-zone_equities_and_corporate_bonds__The_combat_between_fundamentals_and_risk_aversion_5页_665kb

Flash Economics Summary

Core Content

This document analyzes the performance of euro-zone equities and corporate bonds in the context of strong corporate fundamentals and rising risk aversion. It highlights the contradiction between the positive underlying economic indicators and the weak market performance observed since February 2018.

Main Points

Positive Fundamentals for Euro-zone Corporate Securities

• High profitability: Euro-zone companies are showing strong profitability levels.
• Rapid earnings growth: Earnings per share have been growing significantly, as shown in Table 1.
• Improvement in credit quality: There has been an increase in the number of credit upgrades compared to downgrades.
• Falling default rates: The rate of corporate defaults has decreased.
• Low long-term interest rates: Interest rates remain persistently low, which is favorable for corporate financing.

Market Deterioration Despite Strong Fundamentals

• Equity market weakness: European equity markets have been weak since February 2018.
• Corporate bond market decline: Credit spreads have widened since March 2018.
• Risk aversion as the main factor: The decline in markets is not due to worsening fundamentals but to an increase in risk aversion.

Factors Contributing to Increased Risk Aversion

• Protectionist policies: Concerns about trade restrictions and economic uncertainty.
• Geopolitical tensions: Ongoing conflicts with Russia and Iran.
• Italy's economic crisis: Political and economic instability in Italy has heightened risk concerns.

Key Information

• The document suggests that investors should focus more on the risk environment than on fundamental analysis when evaluating euro-zone equities and corporate bonds.
• Market valuations are currently low relative to fundamentals, indicating potential for recovery if risk aversion decreases.
• The positive fundamentals alone are not enough to reverse the market trend if risk aversion remains high.
• The analysis is based on public information and does not constitute a personalized investment recommendation.

Conclusion

Investors in euro-zone equities and corporate bonds are facing a difficult situation due to the high level of risk aversion. While corporate fundamentals remain strong, the market performance is weak. The key to future improvement lies in assessing whether risk aversion will subside.

Disclaimer Highlights

• The document is intended for professional and qualified investors only.
• It is confidential and must not be shared with third parties without consent.
• No liability is accepted for the information provided.
• The content is not a financial analysis and is not subject to legal independence requirements.
• No personalized recommendations are made.
• No guarantee is given that the information is up-to-date or accurate.
• No responsibility is accepted for any actions taken based on the document.

Regulatory Information

• Supervision and authorization details are provided for various jurisdictions, including France, the UK, Germany, Spain, Italy, Dubai, Canada, and Australia.
• The document is only available to professional investors in certain regions, such as Hong Kong.
• Natixis is a foreign bank and broker-dealer, and this report is solely for distribution to major U.S. institutional investors.

Author Disclaimers

• The views expressed in the report accurately reflect the authors' personal opinions.
• No compensation is linked to the recommendations or views in the report.
• The authors may have differing opinions, and Natixis may have issued other reports with conflicting conclusions.

Summary

The euro-zone corporate sector is fundamentally strong, with high profitability, rapid earnings growth, improved credit quality, falling default rates, and low interest rates. However, equity and corporate bond markets have weakened due to increased risk aversion, driven by protectionism, geopolitical tensions, and the Italian economic crisis. Investors are advised to monitor the risk environment more closely than the fundamentals. The document is not a financial recommendation, confidential, and subject to jurisdictional restrictions.