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The coronavirus outbreak has presented major economic and public-health challenges in many parts of the world, Europe is not immune. As the epicenter shifted from Asia to Europe in March, European governments took extraordinary measures to curb the novel coronavirus. Widely implemented containment and social distancing policies brought economic activity to a near standstill.

To help alleviate the economic pressure, the European Central Bank unveiled a new €750 bn Pandemic Emergency Purchase Program (PEPP) and started to buy shorter maturities with a minimum maturity of just 70 days, creating maximum flexibility in its quantitative easing (QE) program.1 On the fiscal front, measures have focused on making up part of the lost income or credit flow to households. European finance ministers delivered a broad fiscal package on April 9th to support healthcare spending and lost job incomes. While European leaders agreed on the need for a sizable €1 trillion or larger emergency fund when they met on April 23, they haven’t agreed on how it will be financed, and the scale of Europe’s fiscal support as a percentage each country’s GDP is not comparable with other developed countries (Figure 1).

Figure 1: Filling the gap

Bar chart shows actual and expected fiscal spending measures and actual loan guarantees across selected developed market economies

Sources: BlackRock, finance ministries, April 2020. Forward looking estimates may not come to pass.

We remain underweight European equities, as we see greater upside potential in other regions. More importantly, not all European countries are created equal. Greater variation in government policies and economic drivers could lead to differentiated performance in the next few months, as many countries pass the peak of the outbreak and seek ways for safely easing lockdowns. We prefer to remain selective in European equities, favoring exposures in economies that could be better positioned to weather the negative impact of coronavirus containment measures.

Figure 2: Flows into Europe focused ETPs

Line chart showing U.S. listed ETP flows into single country Europe exposures.

Source: Markit, as of April 10, 2020

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Coronavirus impact and government response

In just a few weeks, the U.K. followed the United States, Italy, France and Spain to become the fifth country to pass the 10,000 deaths toll. More than 85,000 people in the U.K. have tested positive as of April 13, 2020, including Prime Minister Boris Johnson, who was recently discharged from the hospital.2

The country has reacted quickly to alleviate the economic impact. The Bank of England cut rates by half of a percentage point on March 11 before another 0.15 percentage point cut on March 19 alongside a QE increase of 200 bn pounds. The U.K. Treasury activated a funding facility for spending that will be directly financed by the Bank of England, rather than the gilt market. The U.K. has taken the step to cover 80% of the wage bill of workers in sectors affected by the pandemic, including the self-employed.2

Earnings prospect

Currently, analysts expect earnings of shares in the MSCI United Kingdom index to decline by 4% year over year in a forward twelve-months basis, compared to an average of 0.6% growth for companies in the MSCI Europe index.2

Implementation and flows

We expect the pound and U.K. domestic exposures to stabilize over the next few months as COVID-19 related uncertainty recedes, but currency hedged exposures, represented by the MSCI currency hedged United Kingdom index, may provide investors an effective way to remove currency risk associated with U.K. investments.

In flows, market sentiment has turned more positive after the country avoided a no-deal Brexit last year. After an absence of buying for much of the year, U.K.-focused U.S. listed ETPs attracted more than $400 million in inflows since September 2019.3

Figure 3: Currency volatility

Alt text: Line chart showing dollar to pound spot rate.

Source: Bloomberg, as of April 10, 2020

Coronavirus impact and government response

After the German economy narrowly avoided a technical recession in the third quarter of 2019, it is likely to remain weak in 2020. Businesses with international exposures are suffering from global demand and supply disruptions caused by the COVID-19 outbreak, adding pressure to its weak industrial production growth in the past two years (Figure 4).

Figure 4: GDP and industrial production growth %

Bar chart showing GDP growth and line chart showing change in industrial production.

Source: Thomson Reuters, as of April 10, 2020

Germany has proposed measures to make up the pay shortfall for short time working shifts, covering 2.5 million workers compared with 1.5 million during the global financial crisis. The European Union is now planning to mimic Germany’s program with something similar for all 27 member countries and fund it with €100 billion of borrowing.4

Earnings prospect

Currently, analysts expect earnings of shares in the MSCI Germany index to grow by 8.2% year over year in a forward twelve-months basis, much stronger compared to an average of 0.6% for companies in the MSCI Europe index.2

Implementation and flows

Germany underperformed the broader region, with the MSCI Germany index declining 26.7% in the first three months of 2020 . Despite the weak performance, Germany focused U.S. listed ETPs saw modest inflows, with $256 million in the first three months of 2020.3

Investors who are cautious with currency risk should also consider expressing views in Germany exposures with the MSCI currency hedged Germany index, which outperformed its unhedged cousin by one percentage point due to currency movement in the first quarter of 2020.4 In addition, the MSCI Germany Small-Cap Index allows investors to express their views with a more precise group of German companies.

Coronavirus impact and government response

With 162,488 confirmed cases and 21,067 deaths reported as of April 15th, Italy is one of the countries that has been hit the most by the COVID-19 outbreak.5

Italy’s Prime Minister Giuseppe Conte has extended the country’s nationwide lockdown until May 3, rejecting pressure from businesses and opposition politicians who’ve clamored to restart the economy. Meanwhile, the country has adopted an emergency plan worth 25 billion euros ($28 billion) to support an already weak economy.2

Earnings prospect

Due to the spread of COVID-19 cases in March, analysts expect earnings of shares in the MSCI Italy index to fall by 3.7% in a forward twelve-months basis.2

Implementation and flows

As the country suffered from negative consequences from the COVID-19 outbreak, investors have been pulling money out of Italy focused U.S. listed ETPs this year. Those funds have seen $71 million in outflows in the first three months of 2020.3

Figure 5: Italy GDP forecast

line charts showing the BlackRock Growth GPS which indicates where the 12-month forward consensus GDP forecast may stand in three months' time. There is no guarantee these estimates come to pass.

Source: BlackRock Investment Institute with data from Bloomberg and Consensus Economics. Data as of April 10, 2020

Coronavirus impact and government response

Switzerland has registered 28,207 confirmed COVID-19 cases as of April 23rd. The country’s Federal Council offered rapid access to credit facilities to bridge liquidity shortfalls and the government has distributed emergency loans to more than 76,000 small businesses, substantially more than other countries in Europe.7

While Switzerland's central bank left its interest rates unchanged at -0.75%, it raised its negative interest exemption threshold, to prepare the economy from negative shocks from the COVID-19 outbreak.8

Earnings prospect

Currently, forward 12-month earnings estimates for companies in the MSCI Switzerland index hold strong with 4.1% growth projected versus 0.6% for the broader Europe region.2

Implementation and flows

The MSCI Switzerland index has outperformed in the region year to date, down only 10.4% compared to 24.3% in the MSCI Europe index as of April 15th.8 This is not surprising given the index’s large exposure to defensive sectors such as consumer staples and health care. The two sectors make up more than half of the index’s total market weight (figure 6). In addition, Switzerland also enjoys better health care infrastructure, limited net exposure to oil and greater financial and political stability compared to its neighbors in Europe.

We advocate for being selective in European equities and like high quality exposures such as Switzerland that could be better positioned to weather the negative impact of coronavirus containment measures.

Figure 6: Sector breakdown

Bar chart showing breakdown of the MSCI Switzerland index.

Source: Bloomberg, as of April 10, 2020

Indexed to MSCI
Christopher Dhanraj
Director, Head of iShares Investment Strategy
Jasmine Fan contributed to this article.
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