European Stocks Are Coming In From the Cold
(Bloomberg Opinion) -- It’s no secret that U.S. stocks have whipped their European counterparts in recent years. Between the start of 2010 and the end of 2020, the Euro Stoxx 600 index gained less than 60%, trailing the S&P 500 index’s 237% increase. Even including dividends, the European benchmark delivered a total return of just 130%, compared with more than 300% for the U.S. measure.
This year, the picture is different.
The prospect of faster inflation has dimmed the allure of the technology stocks that have been the main driving force behind the U.S. market’s outsize gains. There’s also renewed investor interest in so-called value stocks, which are more prevalent in the European index, after several years of growth stocks commanding most of the attention.
But there are also domestic economic reasons for why European equities are enjoying a renaissance.
Earlier this week, the European Union sold 20 billion euros ($24 billion) of bonds to kickstart the fundraising effort to finance the bloc’s 750 billion euro NextGenerationEU pandemic recovery program. With planned annual borrowing of at least 200 billion euros, talk of Europe’s “Hamilton moment” doesn’t seem quite so hyperbolic now that the plan is live. The coronavirus has galvanized the region into action; now there’s fiscal support to reinforce the monetary actions taken by the European Central Bank.
That’s stirring expectations for a stronger, swifter economic rebound than was previously expected. The ECB earlier this month raised its growth forecasts for this year and for 2022, increasing each by 0.6 percentage point. Inflation, though, is expected to slow to 1.5% next year and 1.4% in 2023.
After a disastrously slow start, the EU has also got its vaccine act together, allowing more countries in the bloc to relax restrictions. Consumer confidence, which plummeted as the pandemic took hold last year, has rapidly recovered.
Investors are already paying attention. A Bank of America Corp. survey of global fund managers overseeing $592 billion found a net 35% were overweight euro zone equities, the highest exposure to the region since 2018. The survey showed a balance of just 6% overweighting U.S. stocks.
There may be more gains to come in Europe. Of the 20 industry groups in the Stoxx 600 index, banks have led the advance this year. And Bloomberg News reported on Wednesday that the ECB is set to extend a capital relief program for financial firms that was scheduled to expire on June 27 for an additional nine months. With a regulatory cap on dividends set to be scrapped at the end of the third quarter, banks look set to continue to outperform.
Moreover, even after this year’s gains, European stocks still look cheaper than their U.S. peers based on where they trade in relation to their expected earnings.
Measured in dollars, investors have made a total return of 16.4% from Europe’s benchmark index this year, handily outstripping the 13.8% delivered by the S&P 500. If the current debate about whether consumer price increases in the U.S. are transitory or more permanent settles on the side of faster inflation, European equities may offer a haven for stockpickers seeking a more benign economic backdrop.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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