The divergences in European economic indicators suggest that the economic recovery may not be as strong as anticipated. However, we remain confident that a recovery will occur and will lead to improved corporate profits.
Although there are clear signs of recovery in the Eurozone, data from different parts of the region show variations. The region's two largest economies, France and Germany, experienced positive growth in the first quarter. However, in Germany, growth was driven by government spending, indicating a more fragile economy than in France, where consumption was the driving force behind the recovery.
Signs that the overall economic recovery in the Eurozone may not be as rapid as anticipated have led to some weakness in major European stock markets in recent weeks. Furthermore, first-quarter results from several large companies have also been disappointing. This has reignited fears that businesses may continue to postpone capital expenditures, thus delaying a full recovery. However, we believe these concerns will not last long: business confidence surveys indicate that executives in various countries are more optimistic about future sales levels.
In the coming months, we expect an increasingly positive outlook for corporate earnings and prospects. While the improving economic conditions clearly increase uncertainty regarding the future trend in interest rates, we believe rates will remain low this year. The ECB has kept rates frozen at 3,25% for six consecutive months, and a continued period of low interest rates should provide further support to the equity markets.
Among Western markets, we believe Eurozone stocks offer the best medium-term recovery opportunities. The region's long-term attractiveness has also grown, as the single market has fostered competitiveness by removing trade barriers. This has enabled companies to become active players on a pan-European scale and, increasingly, on a global scale. To compete at these levels, they have had to implement restructuring aimed at reducing costs and eliminating inefficient practices, leaving them better positioned to capitalize on the expected economic recovery.
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