European Stocks See Worst Week Since March Panic on Growth Woes

(Bloomberg) -- European equities posted their worst weekly decline since the March turmoil amid concerns about a new wave of coronavirus cases and slow economic recovery.

The Stoxx Europe 600 Index closed up just 0.3% on Friday, erasing earlier gains of as much as 1.6%. This brought the weekly retreat to 5.7%, the worst since March 13.

Cyclical and value shares, such as travel, automakers and banks, led the drop this week as investors partially unwound the rotation trade that has fueled the rally since mid-May on the optimism of increased stimulus measures and the relaxation of lockdowns. But after the International Monetary Fund said the global economy is recovering more slowly than expected and concerns rose about a second wave of U.S. infections, investors rushed out of risk assets.

“There’s a massive dislocation that’s going on between financial assets and what’s going on in the real economy,” said Suzanne Hutchins, a portfolio manager on the real return team at Newton Investment Management Ltd. “Right now the market is pausing for breath, it’s gotten ahead of itself in the short-term, but there are a lot of people in the market that are under-invested, that still hold a lot of cash, that are chasing this rally. So the chase has been on, we’ve seen the rotation and now we’re seeing a pause.”

Hutchins said the stock market could trade sideways or fall “a bit,” but it won’t revisit the lows seen in mid-March. The Stoxx 600 had rallied more than 30% from March lows before stumbling this week.

Bank of America Corp. strategist Sebastian Raedler remains upbeat about cyclicals and value stocks, counting on easing lockdowns to lead to pick-up in the economic activity. The strategist sees 20% upside for the Stoxx 600 to 420 by November, according to a note to clients on Friday. European stock funds saw the biggest inflows since February 2018 in the week through June 10, Bank of America said in a separate note citing EPFR Global data.

“While consolidation might not be over and fundamental upside looks limited at current levels, we believe further dips should be bought into,” Barclays Plc strategist Emmanuel Cau wrote in a note on Friday. The “big picture” hasn’t changed and the ample liquidity should continue to act as a backstop to equities, he added.

Friday saw a tentative resumption of the rotation into cyclicals and value shares that had reversed earlier this week. Carmakers, miners and real estate rose 1% or more.

Although value stocks may get another boost in the coming months from recovering economic activity, they are unlikely to stage a more durable outperformance without a strong reflationary rebound, according to Seema Shah, chief strategist at Principal Global Investors.

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