It May Finally Be Europe Stocks’ Time to Shine, Strategists Say

(Bloomberg) -- European stocks may finally outperform the U.S. market next year, said Deutsche Bank AG and Jefferies strategists, joining a growing chorus of bulls that prefer the lagging region.

“The macro cycle in Europe is well behind the U.S., and offers more upside risk,” Deutsche Bank strategists led by Binky Chadha wrote in a note dated Friday, forecasting a 15% return for the Stoxx 600 index next year compared with 12% for the S&P 500 index.

READ: Europe Needs to Prove It’s in a ‘Sweet Spot’: Taking Stock

Jefferies strategists led by Sean Darby, meanwhile, said on Monday that “Europe is back,” citing dovish central banks and the rollout of a commonly-financed pan-European fiscal stimulus next year.

While some strategists have been betting on Europe’s outperformance for years thanks to cheaper valuations and a more cyclical market, these calls have rarely come true. The region’s equities have trailed the U.S. for the best part of the last decade, with U.S. stocks defying concerns about stretched levels.

Valuations are also part of Deutsche Bank’s call to overweight Europe in 2022. Price-to-earnings multiples in the region are about 20% below pre-pandemic highs, while those in the U.S. are about 10% above, according to Bloomberg data. “Europe is trading at a discount even after adjusting for the mega-cap growth and tech companies,” the Deutsche Bank strategists wrote.

And the two firms are not alone in their optimism. Citigroup Inc. strategists led by Beata Manthey said Monday that rising earnings should keep European equities moving higher. Morgan Stanley prefers European equities over those in the U.S., while the end-2022 targets set by Goldman Sachs Group Inc. strategists for the S&P 500 and the Stoxx 600 imply more upside for Europe. 

“European equities will benefit from the European pandemic support program, the ECB will be much less aggressive than the Fed, and also the whole energy revolution will benefit the European market more than the U.S. market,” Ewout van Schaick, head of multi asset at NN Investment Partners, said in an interview earlier this month.

“These are all trades that I would like to play for next year, but there’s one caveat - I had a relatively similar story a year ago.”

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