Vodafone Group Plc (ADR) (VOD), GlaxoSmithKline plc (ADR) (GSK), Anheuser-Busch InBev NV (ADR) (BUD): German, French Indices Vulnerable at Elevated Levels

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Most of the weakness is focused in Southern Europe, but declines in output were seen in all member nations except Germany (which did manage to post negligible growth at +0.1%).  The ECB’s projections for 2013 suggest that the Eurozone will return to positive territory before the end of the year.  But, at this stage, the broader trends are clearly negative.  With interest rates already at historic lows (0.5%), there is limited leeway for the ECB to continue easing its monetary policy, and this removes a potentially supportive factor that would otherwise add to gains in Europe’s benchmark stock indices.

Drops in Consumer, Business Confidence Surveys

Early precursors of the Eurozone recession (the region’s longest recession since World War II) could be seen in sharp increases in unemployment and declines in confidence surveys of both businesses and consumers.  One example can be seen in Spain, where national unemployment rates have reached as high as 27%.  Without an employed consumer base, it becomes increasingly difficult for businesses to improve in terms of earnings performance.  The Spanish economy alone shrank by 2% in the first quarter, and the combination of all these factors makes it very difficult to justify elevated price levels in the IBEX 35 (which remain near their highs for the year).

Avoid Europe’s Heart

When looking at the global economy on a relative basis, European stocks are teetering on the edge of a cliff.  Stimulus programs in the U.S., U.K., and Japan have has a much more pronounced (and positive) influence on the labor markets and overall output growth in these countries.  First quarter GDP performance in the Eurozone does not indicate an absolute freefall in the economy but is negative enough to justify concerns over stock values that remain elevated using a longer term perspective.  Without the added positive of additional interest rate decreases, investors long these markets are likely to start taking profits.  Look for medium term weakness in the IBEX, DAX, and CAC going forward, as limited growth indicates disappointing corporate performance in the coming quarters.

The article German, French Indices Vulnerable at Elevated Levels originally appeared on Fool.com and is written by Richard Cox.

Richard Cox has no position in any stocks mentioned. The Motley Fool recommends GlaxoSmithKline and Vodafone Group. Richard is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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