European Stocks Rally in First Half of 2023
The first half of 2023 has been a positive one for European stocks, with the Stoxx Europe 600 Index rising by 8.3%. This rally has been driven by cyclical stocks, which have been buoyed by the region’s economic recovery.
Economic Recovery
The European economy has been recovering from the pandemic-induced recession of 2020 and 2021. The European Central Bank (ECB) has been providing stimulus to the economy, with the bank’s Pandemic Emergency Purchase Program (PEPP) providing €1.85 trillion in asset purchases. This has helped to support the region’s economic recovery, with the ECB’s chief economist, Philip Lane, noting that the recovery is “well underway”.
Cyclical Stocks Lead the Way
The recovery in the European economy has been reflected in the performance of cyclical stocks. These stocks, which are sensitive to economic cycles, have been the biggest beneficiaries of the recovery. The Stoxx Europe 600 Banks Index has risen by 17.2%, while the Stoxx Europe 600 Automobiles & Parts Index has risen by 16.2%.
Outlook for the Second Half of 2023
The outlook for the second half of 2023 is positive, with the ECB expecting the region’s economy to continue to recover. The bank is forecasting GDP growth of 4.2% in 2023, up from its previous forecast of 3.9%.
The ECB is also expecting inflation to remain low, with the bank forecasting inflation of 1.3% in 2023. This is below the ECB’s target of close to, but below, 2%.
Risks to the Outlook
Despite the positive outlook, there are risks to the region’s economic recovery. The biggest risk is the potential for a resurgence of the coronavirus, which could lead to further restrictions and a slowdown in the recovery.
There is also the risk of a disorderly Brexit, which could lead to disruption in the region’s economy. The UK is due to leave the EU at the end of 2023, and negotiations between the two sides are ongoing.
Conclusion
European stocks have rallied in the first half of 2023, with cyclical stocks leading the way. The region’s economic recovery has been supported by the ECB’s stimulus measures, and the outlook for the second half of 2023 is positive. However, there are risks to the outlook, including the potential for a resurgence of the coronavirus and a disorderly Brexit.