(Bloomberg) – The surge in bond yields this year may have terrified many global stock investors, but fans of the historically below par European market are winning strong.
The blue chip Euro Stoxx 50 index is up 11% this year, outperforming other key market benchmarks such as the S&P 500 index and the Nasdaq Composite index. The predominance of cheap and cyclical stocks has turned from a curse to a blessing for Europe as fund managers focus on pandemic recovery and resent frothy valuations.
JPMorgan Chase & Co. and Amundi, the region’s largest wealth manager, say European stocks may outperform the US this year, despite concerns about the slow pace of vaccination and lockdowns in key economies like France and Italy. Although the broader Stoxx Europe 600 Index is flirting with a record high, it is trading at around 21% discount to the S&P 500 based on its 12-month forward gain.
“Europe is indeed well positioned to benefit from an environment where economic growth is accelerating and interest rates are rising,” said Kasper Elmgreen, head of equities at Amundi, who has around EUR 1.4 trillion in assets. $ 65 trillion). “I assume that the European outperformance will continue.”
The value and cyclical sectors rose sharply in the first quarter, with the Stoxx 600 ads for cars, lenders, and travel and leisure increasing around 20%. According to JPMorgan strategists, Europe benefits not only from its discount ratings and heavy presence of bank stocks, but also from being one of the least crowded equity regions in the world. The Stoxx 600 has outperformed the S & P 500 in the last ten years, except for two.
“We believe the US will not be a direct regional market leader this year. We believe the euro zone should outperform the US, ”the strategists led by Mislav Matejka said in a note. “The valuation case remains attractive.”
JPMorgan is overweight on banks and says this is the sector that correlates most positively with rising bond yields and an economic recovery. Financial stocks have the highest weighting in the Stoxx 600 among the industry groups and account for around 16% of the benchmark, compared to around 11% for the S&P 500.
According to a survey by Bank of America Corp., which has its highest value since August 2020, investors are putting their money where they are. The allocation to euro area equities rose to 30% net overweight in March. In comparison, US stocks had a net overweight of 9%.
Historical trends also support further gains for Europe. The Stoxx 600 tends to generate higher returns in April than any other month, based on the average over the past 25 years.
Of course, the rally in Europe in 2021 faces some risks beyond the current problems with vaccines and viruses. Bank of America expects equity gains to decline after the peak of the macroeconomic cycle in the third quarter. And Mike Bell, a global market strategist at JPMorgan Asset Management, sees European bond yields rising less than the US, which is why he prefers American value stocks.
“To be honest, I’m a bit surprised that European stocks have done so well,” Bell said in a telephone interview. “It’s more of a catch-up business than a rotation.”
For the rally to continue, European companies need earnings growth, said Paul Markham, a global equity portfolio manager at Newton Investment Management. There is good reason to believe this can happen after a record number of companies beat earnings expectations in the fourth quarter.
According to Wei Li, global chief investment strategist at BlackRock Investment Institute, the introduction of botched vaccines is likely only a temporary setback for the region. Once the footage becomes more widely available in Europe, investors can expect accelerated growth through next year, she said.
“I expect a very significant economic and earnings recovery,” said Amundi’s Elmgreen. “At a time when monetary and fiscal policy is very supportive, there is a lot of catching up to do.”
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