For Europe**, the year has started like much of the past decade – struggling to keep up with Wall Street's gains. But some institutional analysts, including Goldman Sachs and MFS Asset Management, believe that familiar pattern may be about to be broken.
In their view, after a long period of not being favored by investors, Europe** valuations look attractive compared to US equities. In addition, there is no risk of the "Big Seven" bubble bursting in Europe**.
Reasons to be bullish on European stocks.
Bank of America's Global** Managers' Survey for February showed that the majority of European** managers believe the region is undervalued, a clear shift from the previous month. At the time, most managers said that Europe was too expensive. At the same time, the proportion of investors who have recorded positive returns in European stocks for the whole year has also jumped from 50% to 78% in just three months.
The Euro Stoxx 600 index has been **2 this year6%, close to the all-time high set in January 2022. But in dollar terms, it's still up 02%, lagging behind the S&P 500, which is at its all-time peak. In the past decade, European stocks have only outperformed US stocks in annual returns.
But for now, some analysts believe that the long era of European stocks underperforming US stocks is coming to an end. On the one hand, higher-than-expected inflation data frustrated the market's previous optimistic expectations of a Fed rate cut, and uncertainty about the timing and magnitude of the Fed's rate cut made investors continue to be sharply** in US technology stocks, and led to increased skepticism in the S&P 500**. On the other hand, investors are increasingly expecting a pick-up in business activity in Europe. European companies are set to have strong earnings this year**, which boosts confidence in the direction of European stocks.
Sanford C. BernsteinSarah McCarthy, a strategist at Bernstein, said the risk of a sharp downgrade in European corporate earnings for the rest of 2024 is low. According to the data, the market expects the earnings of the companies in the STOXX 600 index to fall by 3% last year, and it is expected to be the overall **42%。
Dh**Al Joshi, chief strategist at BCA Research, said it was "unrealistic" to expect earnings growth from U.S. tech giants to continue after last year's big moves. And Europe is a good option for the next few years, because "unlike the United States, there is no bubble in Europe." Long-term investors should increase their exposure to European equities. ”
Robert Almeida, a global investment strategist at MFS Asset Management, also said: "Compared with US stocks, Europe** has definitely become more attractive. For a long time, one reason for the lower earnings of European stocks is that European listed companies are more sensitive to economic conditions than US stocks. At present, the risk of economic gains in Europe is smaller than that of the United States. At the same time, the valuation risk of European stocks is also small. ”
The valuation advantage he mentioned is indeed another major driver for investors to be bullish on European stocks. The ratio of the 12-month forward P/E ratio of the STOXX 600 to the forward P/E ratio of the S&P 500 is near an all-time low.
The "Big Eleven" of European stocks
Based on optimistic expectations for the European economy and European corporate earnings, Goldman Sachs strategist Sharon Bell believes that pro-cyclical sectors related to the economy, such as industrial goods and construction, will benefit from lower energy costs and improved demand. She also believes that despite higher valuations, some of Europe's largest companies will have a brighter outlook for their share prices due to their "relatively defensive" nature, strong earnings growth, low volatility, high and stable margins, and solid balance sheets.
These companies, known as the so-called "granolas" of European stocks, include GlaxoSmithKline, Roche, ASML, Nestle, Novartis, Novo Nordisk, L'Oréal, LVMH, AstraZeneca, SAP and Sanofi. These** account for about a quarter of the Euro Stoxx 600 market capitalisation and account for 60% of all gains in European equities over the past year.
The risk level of European stocks is also much lower than that of the "Big Seven" of US stocks. Over the past three years, the Big 11 have risen as much as the Big Seven, up to 63%, while the overall volatility is only half that of the Big Seven, with a higher five-year return. Unlike the "Big Seven", which are all technology stocks, the "Big 11" involve many fields such as medical care, health care, technology, and FMCG. The "Big Eleven" also pays more attention to rewarding shareholders, with an overall dividend yield of 25%, which is significantly higher than the S&P 500 and the Big Seven, as well as inflation-adjusted real yields on US Treasuries and German bunds, which pay few dividends and are generally more repo-oriented**.
Bell also added that in the last quarter, as the bond yield curve steepened and economic policy uncertainty increased, the probability of high volatility in the world** also increased, and geopolitical risks were more likely to bring more shocks, but the volatility of the "Big 11" remained below the historical average. Therefore, even if the global ** enters a period of high volatility later this year, the "Big 11" can well isolate the overall risk.
In addition to the "Big Eleven", Goldman Sachs believes that European luxury stocks will also recover, helped by strong US consumers. LVMH's resilient earnings have dispelled fears of slowing demand in China and pushed the MSCI Europe Textiles (Apparel & Luxury Goods Index) to climb 22% since mid-January. Bell said.
Finally, despite the lack of tech giants such as Apple and Nvidia in Europe, the region is still reaping the dividends of this round of artificial intelligence (AI) boom through companies such as ASML, ASM International NV and Be Semiconductor Industries NV. Investors are betting that a surge in investment in the AI sector will spur demand for products from related chipmakers. Boosted by this, all three of them have risen by more than 50% since the end of October last year.