News

Eurozone retail sales volumes declined by -0.7% mom in May, slightly better than expectations for a -0.8% mom fall but still signaling weak consumer activity across the bloc. The decline was broad-based, with food, drinks and tobacco sales down -0.7% mom, non-food products (excluding fuel) off by -0.6% mom, and automotive fuel volumes sliding -1.3% […]

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European Stock Market Investment Guide: Opportunities Beyond Infrastructure and Defense

Investors exploring opportunities in Europe have historically gravitated toward sectors benefiting from significant government stimulus, such as infrastructure, defense, and banking. However, given changing market dynamics and currency impacts, diversification beyond these traditional sectors could be valuable.

Here’s a practical Q&A guide to help investors understand how to broaden their European market exposure:

Q1: Why have investors focused heavily on European defense and infrastructure stocks?

European defense and infrastructure sectors have received strong government fiscal support due to heightened geopolitical tensions, particularly following conflicts in Eastern Europe. This stimulus provided increased revenues and profits, making these sectors attractive investment options.

Q2: What is sector concentration risk, and why should investors be cautious?

Sector concentration risk occurs when investors overly allocate to specific sectors, making their portfolios vulnerable if these sectors underperform. While defense and infrastructure have been strong, relying solely on them exposes investors to downturns if government spending reduces or geopolitical dynamics shift.

Q3: What alternative investment strategies can broaden European exposure?

Investors can use “factor-based investing,” targeting broader market segments defined by characteristics such as low volatility, dividend yield, or growth. The low-volatility factor, in particular, has been popular as it includes stable companies across various sectors, reducing exposure to individual industry risks.

Q4: How does a strong Euro currency affect European stocks?

A strong Euro can negatively impact European companies reliant on international revenues. When the Euro appreciates, profits from foreign markets translate into fewer Euros, reducing reported earnings. This makes domestically focused companies potentially safer bets during currency strength periods.

Q5: Should investors shift towards domestically oriented European stocks?

Yes, shifting to domestically oriented companies can help mitigate currency risks since these firms earn revenues primarily within the Eurozone. However, domestically focused stocks often have smaller market capitalization and lower liquidity, meaning they may be harder to buy or sell quickly.

Q6: Which sectors outside infrastructure and defense could offer diversification?

Apart from infrastructure and defense, European investors may consider:

• Consumer Staples: Stable demand and steady earnings.

• Healthcare: Consistent demand due to aging populations.

• Technology and Innovation: Emerging companies benefiting from Europe’s push for digitalization and green energy solutions.

• Renewable Energy: Supported by substantial government subsidies and Europe’s commitment to green initiatives.

Q7: What practical steps can investors take now to diversify their European holdings?

• Evaluate portfolio exposure: Check existing allocation to avoid over-concentration.

• Explore factor-based ETFs or mutual funds: These can provide exposure to multiple sectors simultaneously.

• Monitor currency trends: Keep an eye on Euro strength and adjust investments toward domestic companies if necessary.

Q8: What’s the outlook for European equities in the upcoming earnings season?

The upcoming earnings season will clarify how much the strong Euro impacts corporate profits, particularly for multinational corporations. Investors should watch closely and adjust positions accordingly, prioritizing companies demonstrating resilience against currency headwinds.

Expand European Stock Exposure for Risk-Managed Growth:

Broadening your European stock market exposure beyond defense and infrastructure can help manage risks and position your portfolio for sustainable growth. Using factor-based strategies, domestic-oriented companies, and diversified sector investments are smart moves for navigating Europe’s dynamic investment landscape.

ForexLive will also be expanding into a new brand called investingLive.com, coming to you by the end of this summer. Stay tuned!

This article was written by Itai Levitan at www.forexlive.com.

Fundamental
Overview

The S&P 500 continues
to be supported given the lack of bearish drivers. Last Thursday’s NFP looked
like it could offer a bigger pullback on a hawkish repricing in interest rate
expectations but the positive data came with lower wage growth, which is great
for the stock market.

In the short-term, the only
risk I can see is further hawkish repricing in interest rates expectations, but
we will likely need a hot CPI for that. That should provide a deeper pullback. But
given that the Fed’s reaction function remains to either wait more or cut, the
market should eventually get back to its upward trend.

We now have two main risks
ahead for the bulls: tariffs noise and US CPI. The White House is expected to
sign trade deals and send letters with the new tariff rates to countries that
have not reached a deal yet. The good news is that we have once again a
deadline, which is August 1st. Therefore, it looks like the usual negotiations
tactic to speed up the process and accept the US requests.

On the other hand, we have
the US CPI coming up next week. To keep the trend going, we would likely need
soft inflation figures as a hot report should trigger a deeper pullback.

S&P 500
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that the S&P 500 continued to print new all-time highs pretty much everyday
once the price broke above the February highs. From a risk management
perspective, the buyers will have a better risk to reward setup around the
previous all-time high at 6,160-ish level to position for the continuation of
the uptrend. The sellers, on the other hand, will want to see the price breaking
lower to pile in for a drop into the 6,000 level next.

S&P 500 Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that we have an upward trendline defining the uptrend. If we were to
get a pullback all the way into the trendline, we can expect the dip-buyers to
lean on it to position for a rally into new all-time highs with a better risk
to reward setup. The sellers, on the other hand, will look for a break lower to
increase the bearish bets into the 5,800 level next.

S&P 500 Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a minor upward trendline defining the bullish momentum on this
timeframe. The buyers will likely continue to lean on the trendline to keep
pushing into new highs, while the sellers will look for a break lower to target
a deeper pullback into the 6,236 level first and, upon a further break lower,
into the 6,160 price area.

Upcoming
Catalysts

The only notable
events this week are Trump’s letters on tariffs and trade deals, and
the US Jobless Claims figures on Thursday.

This article was written by Giuseppe Dellamotta at www.forexlive.com.