European Stock Winners and Losers Upended Amid China Effect

  • Italian shares among region's best in 2015, German stocks fall
  • `The specifics for every country now matter the most'

Choosing which European stocks to invest in used to be straightforward: either stable markets unscathed by the continent’s debt crisis or riskier countries whose shares were cheaper.

That’s been upended this year. So-called peripheral nations such as Italy and Ireland are outperforming Germany and other "core" countries as local equity markets respond to their own imperatives, including a slowdown in China, elections and corporate scandals.

Italian stocks are on track to outperform Germany’s for the first time in 11 years, Irish equities are having their best year since 2013 and Spain’s benchmark gauge, which moved in the same direction as Italy’s for the past two years, is plunging. Banco BPI SA’s Javier Barrio says that divergence is set to continue.

“The specifics for every country now matter the most,” said Barrio, an equity sales trader at Banco BPI in Madrid. “The core-versus-periphery analysis is now less relevant. I don’t think the periphery risk can be used the same way as it was during the crisis, at least not with the same intensity.”

Stocks across Europe advanced today after Federal Reserve Chair Janet Yellen clarified the central bank’s stance on the trajectory of interest rates.

Spanish and Portuguese elections, China’s slowdown and company-specific news have also become more important to investors. If the peak of Europe’s debt crisis led them to favor German and French stocks over those in Ireland and Portugal, promises of support from the European Central Bank in mid-2012 then also started buoying peripheral markets.

This year, bets that the ECB’s quantitative-easing program will propel a broad-based rally in the region’s stock markets haven’t exactly panned out.

Instead, turmoil in Asia weighed on German exporters, while uncertainty over the Fed’s rate decision cast doubts over the euro weakening to help support an economic upturn. The currency has strengthened against the dollar since March, and growth in the region’s countries remains fragile, forcing investors to be selective in backing stocks.

Germany’s DAX Index has slid 24 percent from an April record amid a slowdown in China -- the country’s biggest trade partner outside western Europe -- corporate scandals such as Volkswagen AG’s pollution-cheating case and concern over the impact of nuclear power-regulation changes on utilities EON SE and RWE AG. Rallies in industrial companies have helped France’s CAC 40 Index hold on to gains this year.

Below Peak

Italy’s FTSE MIB Index has surged, with investors speculating it has more to go. Even after an 8.3 percent jump in 2015, the benchmark trades 54 percent below its 2007 high. That contrasts with Germany’s DAX, which hit 27 records this year before starting its descent in April.

Italy is “coming from a lower base,” said Joe Tracy, head of continental European equities at Svenska Handelsbanken AB. “They don’t have the companies that have been exporting and leading the way like Germany.”

Not all’s well in the periphery. Spain’s IBEX 35 Index is down 9.6 percent in 2015 as concern grew that an anti-austerity party is gaining political momentum, and Banco Santander SA, the country’s biggest lender, tumbled amid investor worry that it will struggle to build capital ratios to match peers.

For Aviva Investors’ Peter Fitzgerald, the correlation among Europe’s markets will weaken further as traders focus more on stock-specific news rather than broader economic risks in the region.

“You’ll only get a big difference between core and periphery again if there’s a reappearance of the economic crisis,” said Fitzgerald, head of multi-asset strategy at Aviva in London. “During a crisis it’s the country risk that matters more, but when you’re getting out of that crisis, investors start looking at individual companies more.”

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