Citigroup: Euro Zone No Longer A Single Economy

In a commentary article in Financial Times, equity strategist Jonathan Stubbs at Citigroup warns investors of continue to treat the euro zone as a single economy. It shows how investors are already lining up to exploit the widening imbalances of the euro zone. This is something of which the EU’s political class is largely unaware off.

“In particular, it is important for global investors to realize that Europe is a region where one size does not fit all.”

Jonathan Stubbs


European fund managers and global asset managers have in the past treated the euro zone as a single investment entity. But in a short commentary in the Financial Times the equity strategist for Citigroup, Jonathan Stubbs,  makes an extraordinary statement that investors would be unwise to continue to treat the euro zone as a single economy.

Citi’s economics team, headed by Willem Buiter, believes that the southern European countries will persistently underperform against the northern.

Stubbs also writes that countries with weak balance sheets would try to arbitrage the strong corporate sector balance sheet by raising taxes and increasing regulation.

The troubles of the south will keep a lid on euro zone interest rates, and the Citi-strategist’s advice to investors is to get exposure to the beneficiaries of cheap money – i.e. the north of the euro zone.

The growing economic divergence across Europe means that the return of investing on a country basis should be more than just a passing phase, according to Jonathan Stubbs.

He writes that while it has paid to take a country by country approach in Europe recently, it is still an alien concept to many investors, especially those European fund managers who have been brought up on a diet of industry selection during the past decade, and global investors who treat Europe as one.

“In particular, it is important for global investors to realize that Europe is a region where one size does not fit all. Our economists expect ongoing economic underperformance from southern Europe relative to northern Europe over the coming quarters and years.”

Mr Stubbs points out that countries with weak balance sheets may well look to arbitrage the strong corporate sector balance sheet by raising tax rates and increasing regulation.

“Structurally this is likely to maintain the better earnings momentum for the north over the south. We believe backing earnings momentum will remain a successful strategy,” he writes.

“The problems in the south are allowing much of the north to be freeriders. Interest rates and the euro are set to be lower for longer. Getting exposure to the beneficiaries of cheap money is likely to be an important driver of performance,” Jonathan Stubbs concludes.

Related by the Econotwist:

2010 EU Deficit Exceed 7% – Commission Suggest “Cold Showers”

EU Deficit Increased By14 Billion Euro In First Quarter Of 2010

Deficit Crisis: Cyprus, Denmark And Finland Join The Watchlist

DnB NOR Finds Markets Participants EURNOK Expectations “Remarkable”

Fitch: Spanish House Prices To Fall Another 20%

Pressure On Spain To Cut More

EU Prepares For Spanish Bailout, Newspaper Says

EU Officials Fears Second Depression And War

Warns Against Euro Zone “Elite”

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Filed under International Econnomic Politics, National Economic Politics