(Bloomberg) – For such a long time, European stocks have been back on track, with Credit Suisse Group AG and Morgan Stanley joining an increasingly bullish refrain. The investors take note of this.
The Euro Stoxx 50 index of eurozone blue chips rose 13% in 2021, outperforming the S&P 500 for the first time since 2017 and outperforming all other major regional benchmarks in the first five months of the year. This coincided with a recent surge in European equity fund inflows, while Bank of America Corp.’s latest global fund manager survey found that euro area equities are now the largest regional equity overweight.
“This outperformance must continue as Europe has an opportunity to catch up with the US if vaccination programs pick up,” said Catherine Doyle, strategist on the real return team at Newton Investment Management at BNY Mellon, which is overweight Europe for Europe to global stocks.
What makes Europe so attractive right now is the huge presence of cheap sectors sensitive to economic recovery and accelerated by a surge in vaccination efforts that originally lagged the US and UK. The region is also less prone to inflation concerns, which have spooked markets lately amid a relative lack of its hardest hit sectors such as technology.
Such factors are a catalyst for historically low valuations. The Euro Stoxx 50 index is trading at 17.6 times 12 month earnings, compared to 21 times the S&P 500 and 26 times the Nasdaq. Unlike most global indices, it has not yet reached its record high or even surpassed its 2008 high.
The recent outperformance of Europe is only just beginning to attract the attention of market participants. Credit Suisse raised continental European stocks to an overweight position on Thursday. She pointed to the region’s potential for economic growth to lag behind the US, exposure to the green energy boom and low investor positioning compared to other regions.
Morgan Stanley favors European stocks over the US when it comes to recovering earnings as the Biden administration plans to hike corporate taxes. According to Chris Dyer, Director of Global Equity, the US investment management company Eaton Vance is “significantly” overweight in global and international equity portfolios in Europe.
According to data from Bank of America and EPFR Global, European equity funds have risen in inflows over the past six weeks. However, there is still a long way to go to catch up with their peers. By 2021, the region had risen to just $ 4.8 billion, compared to a whopping $ 181 billion invested in U.S. equity funds. Last year, investors pulled around $ 43 billion from European equity funds, most of them among the major regions.
International investors are also voting for euro area stocks by piling into exchange-traded funds. The US-listed SPDR EURO STOXX 50 ETF will have its largest inflow month since 2017 with around USD 300 million in new additions in May, while the iShares MSCI Eurozone ETF recorded its largest one-day inflow of USD 187 million since October 2019 this week.
However, the strategists surveyed by Bloomberg see only limited opportunities for profits compared to the current level until the end of 2021. The average forecast for the Euro Stoxx 50 is 4,012, a decrease of 0.3% from the close of trading on Friday. This type of market might favor stock pickers over index followers.
Newton’s Doyle likes automakers like Volkswagen AG, which can benefit from the adoption of electric vehicles, energy companies like RWE AG, which are campaigning for a move to green energy, and low-cost airline Ryanair Holdings Plc, which expects to take advantage of increasing passenger numbers, when the journey is resumed. Volkswagen is down 12% from its peak in April and 42% year-to-date, while RWE is down 5.6% this year and Ryanair is down 0.2%.
Luke Newman, who runs long-short funds at Janus Henderson Investors, says he is net long long euro area stocks and net short US funds as Europe is only now in “final development.” ” entry.
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“Continental Europe has left the US and UK behind in the unlock trade due to waves of infections and the introduction of vaccines,” Newman said in a video interview. “We believe that the time has come when the market is ready to look not necessarily to this year but to 2022 and 2023 and to accept a recovery for the disadvantaged development areas of the market.”
He sees Safran SA, a French aircraft engine manufacturer that grew just 3.4% this year, and Sodexo SA, a French food services and facility management company that grew 13% in 2021 but increased 10% from its March peak went back. than some of the companies that can benefit from the recovery.
Kevin Thozet, member of Carmignac’s investment committee, says the European market is in a “sweet spot” due to its balance of cyclical and high-quality names such as luxury companies, which make up a large part of the index. The French asset manager, with assets under management of 39 billion euros, holds shares that include Safran and Ryanair as well as LVMH, Hermes International and Ferrari NV.
“The big attraction in the US has long been the technology sector. There are tech companies in Europe, but they’re not that important. This has not helped European stocks in the past, but there is currently a rotation and Europe is benefiting, ”Thozet said in an interview.
Tax and monetary stimuli, as well as a rebound in consumer spending, should allow euro area activity to return to pre-Covid levels by the end of 2021, said Wei Li, global chief investment strategist at BlackRock Investment Institute. BlackRock raised euro area stocks to neutral in February, favoring them over the European credit market.
“In addition to a more positive macro background, we see the valuations in the euro area as supportive,” she said via email. “We still expect a quick restart of activities from the second half of the year.”
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