Equity strategists are now placing their bets on Europe, according to a recent report.
The United States' economic engine is humming, with steady growth. However, investors are gradually shifting their focus from the US to Europe in the equity market. Surprisingly, the European economic scene offers little reason for this shift.
Contrastingly, the American economy has been outperforming Europe for a long time- it is growing faster, companies are more profitable, and share prices rise at a faster pace. Yet, equity analysts are now giving a nod to European stocks. UBS, a prominent Swiss bank, reports a "U-turn" where Europe surpasses the US in its "regional valuation table" for the stock markets, reports CNBC. Japan tops the list, followed by the UK and Europe, and then the US, which is the largest stock market on the planet.
UBS strategists aren't the only ones who previously favored US equities over European ones and are now reevaluating the situation. Morgan Stanley also announced a change of heart, informing clients that they were stopping the US overweight over Europe. According to financial data cited by Reuters, hedge funds have been overweighting European stocks over American ones for several months now.
Despite the significant difference in economic data, this move seems strange. The US is growing four times faster than Europe. US GDP grew 1.6% in Q1 compared to 0.3% in the Eurozone. UBS strategists state that this gap will likely narrow, and it's due to the possibility of the US Federal Reserve being more cautious about lowering key interest rates than the European Central Bank. While growth in the US will slow down, Europe should start making a comeback. UBS speculates that there's a higher likelihood of positive surprises in Europe and negative ones in the US.
However, it's not a reversal in economic growth that will make European stocks shine against American ones in the coming future. Rather, it's largely due to the difference in starting share prices. European stocks are relatively cheaper compared to their American counterparts. According to Morgan Stanley data, eurozone equities cost an average of 13.3 times expected corporate earnings, as opposed to 21 times for US equities.
Additionally, US strategists highlight that the earnings growth of American companies has been heavily dependent on factors that won't last. This mostly refers to substantial tax cuts and rebates, which aren't likely to be repeated. This trend doesn't seem prevalent in Europe, creating a significant gap between the two markets that can't be justified for much longer.
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Despite the stronger economic performance and higher share prices in the USA, some equity analysts, such as UBS and Morgan Stanley, have shifted their focus to European stocks due to their relative affordability. For instance, eurozone equities cost an average of 13.3 times expected corporate earnings, while US equities cost 21 times.
This shift in investor sentiment towards European stocks, despite weaker economic growth in Europe, can also be observed in hedge fund data, which has shown a preference for European stocks over American ones for several months. The share prices of US companies, which have benefited from substantial tax cuts and rebates, may experience a slowdown as these factors become less prevalent in the future.
Source: www.ntv.de
