European Stocks’ Year to Forget Leaves Some Memorable Milestones

(Bloomberg) -- The Stoxx Europe 600 Index finished the year with the worst performance in a decade, marked by the weakest volume since 2000 despite a broad sell-off and high outflows.

“Economic momentum is deteriorating in the U.S. and there is little evidence of a stabilization, not to mention an improvement, in the rest of the world,” said Fabrizio Quirighetti, chief investment officer for Syz Asset Management.

The Stoxx Europe 600 index rose 0.5 percent on Monday, ending December with a drop of 5.5 percent. For the whole of the year, the broad European gauge recorded eight negative months and fell 13 percent, the most since 2008. The index has so far managed to stay away from bear market territory, in contrast with the Euro Stoxx 50, Germany’s DAX and Italy’s FTSE MIB, which all entered bear markets earlier this year.

European Stocks’ Year to Forget Leaves Some Memorable Milestones

The optimism around European equities at the beginning of 2018 proved short-lived as stocks succumbed to the shocks of trade wars and slowing economic growth that battered global markets. The continent brought more misery upon itself as investors recoiled from the never-ending Brexit saga, budget turmoil in Italy, mayhem sparked by the Yellow Vest protests in France and renewed worries about Greek debt.

To make matters worse, European companies delivered lackluster earnings and gains in corporate profits lagged their U.S. counterparts, which got a boost from massive tax cuts by the Trump administration. Once again, the Stoxx Europe 600 Index proved unable to make a sustained breakthrough in the ceiling that has capped gains since 2000, and the benchmark has now broken the long-term bull trend it started in 2009.

European Stocks’ Year to Forget Leaves Some Memorable Milestones

The gauge is closing out its worst year since the financial crisis, a decline that has depressed stock valuations to a six-year low. The index’s price-to-earnings ratio is back at 2013 levels, and dividend yields haven’t been this high since 2012. For months, analysts have been saying European stocks are cheap, few more so than the pummeled auto sector, where price-to-earnings ratios have dropped to 5.8, while bank stocks trade at just eight times estimated 2019 earnings.

European Stocks’ Year to Forget Leaves Some Memorable Milestones

That’s failed to entice investors, who have used just about any bounce in stock prices this year to sell. More money fled European stocks in 2018 than any other major region, with net outflows in 40 out of the past 41 weeks. EPFR Global’s numbers show that European equity funds have lost about $73 billion of assets this year. The closest thing to a silver lining is that 2016 was even worse, when the exit totaled $100 billion.

“Yes, valuations are cheaper than three or six months ago, but in a context of deteriorating macro backdrop, as we are now, they probably aren’t cheap enough to justify per se a sustained rebound,” Quirighetti said.

European Stocks’ Year to Forget Leaves Some Memorable Milestones

The broad sell-off has left every sector in the red, with autos in the bottom spot, closely followed by banks. Top-performing industries in the first half, such as basic resources, technology and retail, were later overwhelmed by trade tensions and faltering economies. High-flying oil stocks began to fall to Earth in October as crude prices tumbled. WTI crude slumped 40 percent in 55 trading days and remains near $46 a barrel, compared with $76 less than three months ago. Defensive sectors such as utilities and health care were clear outperformers.

European Stocks’ Year to Forget Leaves Some Memorable Milestones

Not only is this the worst year for European equity returns since the financial crisis, trading volume has also dwindled to the lowest since 2000. That long list of uncertainties from London to Rome and Paris to Athens has driven investors away.

European Stocks’ Year to Forget Leaves Some Memorable Milestones

This has certainly been a year to forget for European equities, but it will leave some other memorable milestones for investors. Cash outperformed equities and bonds for the first time since 1994, according to Bank of America Merrill Lynch. You need to go all the way back to 1969 for the last time cash returns were positive while equity, credit, and government-bond returns were all negative. If that’s not sobering enough, consider that the slump in stocks from January highs wiped out about $17 trillion in global market capitalization, equivalent to the gross domestic product of the European Union.

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