By Thomas McGarrity, Head of Equities for RBC Wealth Management in the British Isles
The European Technology sector and traditional defensive sectors including Health Care have notably outperformed in March. The rotation into stocks with resilient characteristics is consistent with the downside risks to economic growth as bank lending conditions tighten.
Both Technology and Health Care have been boosted by positive corporate developments. Europe’s semiconductor firms gained after German chipmaker Infineon Technologies raised its sales and margin guidance citing strong demand for automotive and industrial chips. Meanwhile, Novartis reported positive data in a key breast cancer trial, while Sanofi and Novo Nordisk announced positive trial data in COPD and diabetes trials, respectively.
We believe Europe’s Technology and Health Care sectors offer some of the most compelling long-term investment opportunities within the region, underpinned by strong innovation and supportive structural trends.
March headline inflation in Spain and Germany tumbled thanks to energy prices that are now markedly lower than they were a year ago. Spanish CPI inflation decreased to 3.3% y/y in the year to March, compared to a much higher 6% in February. German headline inflation declined to 7.8% y/y in March, compared to 9.3% y/y in the prior month. Further improvements are likely, in our view, as price pressures in energy and agricultural commodities have waned.
However, core inflation barely improved, as past energy price increases are being passed on with a lag in the service sector. March core inflation in Spain only decreased by 0.1 percentage point to 7.5% y/y. RBC believes this pattern of falling headline inflation and sticky core inflation is likely to be apparent in the euro area inflation data due to be released on March 31.
We therefore think the European Central Bank is likely to continue its aggressive hiking path. We expect the deposit rate to peak at 3.5%, from the current 2.5%.
In the UK, the British Retail Consortium released data suggesting shop price inflation accelerated to 8.9% y/y in March, with food prices increasing 15% due to shortages. Markets are now expecting an additional rate hike from the Bank of England, with the Bank Rate peaking at 4.5%.
