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European equity markets kick off 2023 from a position of strength

Date: 24 Jan 2023

Vicente Bunn

Thomas McGarrity, Head of Equities at RBC Wealth Management, examines how the European equity markets have performed at the start of 2023.

Head of Equities at RBC Wealth Management, Thomas McGarrity, examines how the European equity markets have performed at the start of 2023 and the firm’s expectations of specific sectors over the next 12 months.

European equity markets have started 2023 on the front foot, with the STOXX Europe 600 ex UK Index gaining more than 3.5% in euro terms (+1.8% in USD). Prominent gainers included stocks exposed to the reopening of China’s economy. We believe stocks and sectors well-placed for China’s reopening over the next 12 months, such as luxury goods firms, offer attractive opportunities for investors within European equities this year.

A short-selling squeeze also appears to be taking shape in the early trading days of 2023. Many of 2022’s worst-performing stocks, as well as companies with an elevated amount of shares out on loan (a signal of short interest), have seen their shares rally 10%–20%. This technical, rather than fundamental, dynamic is unlikely to have legs beyond the very short term, in our view.

In the UK, retail bellwether Next announced sales for the Christmas period above consensus expectations, enabling the company to upgrade its full-year profit guidance. The company’s stock gained more than 7% following its statement, and the broader retail sub-sector was buoyed by hopes that other UK retailers could also have generated sales above consensus expectations through the holiday season.

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