In a US bust mode, meaning growth is decelerating, a wise equity investor gets rid of their growth stocks and safely turns to consumer staples, consumer discretionary, materials, utilities, or energy.

It’s a tougher decision than it looks, since the top US growth stocks − the FAANMG (Meta, Apple, Amazon, Netflix, Microsoft and Alphabet) − generated so much revenue following the 2008 crisis, they propelled the US stock market high into the sky.

What if growth were not flattening everywhere and across all sectors? What if China reopening, for instance, were to provide an extended leg up?

Any appealing growth stocks and possibly more resilient than the FAANMG left in the market?

Yes, the “French FAANMG”!

Equity returns are sensitive to earnings and the price-earnings ratios. Earnings are sensitive to boom bust cycles, i.e., economic growth.

However, pre-empting booms and busts are challenging since GDP figures are published with a lag and are subsequently revised. So, we can be up to six months behind schedule; this is rather late for a portfolio manager.

Here, we propose a real-time bust tracker ranging from 0% to 100%, by country, and at a world level. Bad news: It reaches 95%.

This note continues on the GDP accounting model introduced by Gavekal-IS in August 2022, by analysing and comparing the place of energy in the GDP production of the European Union, Germany, France and Italy.

In the context of the 2022 Russo-Ukrainian conflict, the model is able to provide estimates of the potential impacts of energy price spikes or volume shortages on the GDP output, which is a particularly salient issue for the economy of the European Union.

In particular, in the year ahead, with a 1 in 3 chances, the model reports that, even in the absence of any shortage in energy supply, the whole European Union, Germany, France and Italy would go into recession at rate of -1.2% to -0.3%.

The economy having the highest exposure to recession because of primary energy price spikes and volume shortages is Italy.

Is Italy today all about politics?

In August, we developed our first econometric model about economic growth, applied to the European Union. There were two innovations:

This week, we provide simulations to compare Germany, France, and Italy. This letter is published together with the model in full detail for quant teams.

Beware of Italy!

Introducing the first econometric model of Gavekal-IS, about economic growth, as summarized in our previous publication, “Economic Value-at-Risk”. This time, with full transparency, mathematical, data construction, and simulation details.
Our goal here is to track the economic Value-at-Risk of the European Union facing the unprecedented combination of primary energy scarcity, primary energy massive inflation, and secondary inflation.

The first econometric model of Gavekal-IS, about economic growth.

For almost 40 years, financial institutions have developed sophisticated risk measures of investment portfolios, such as Value-at-Risk, and numerical simulation tools, not just central scenario estimators, namely the expectation of return. And surprisingly, economists have done little to no follow-up on this major innovation.

But today, the question of growth in the European Union deserves more than a central scenario. The current political decisions could very well cause the economic trajectory of the European Union to drift dangerously.

Just how far dangerously? And what probability?