European stocks have outperformed those of Wall Street over the past month, driven by what investors see as progress in tamping down the Covid-19 outbreak and a strong response from policymakers.
The US blue-chip S&P 500 index ended June just 1.8 per cent higher after frequent bouts of volatility, unable to build on a more than 40 per cent rally from its mid-March lows.
European stocks performed better over the same period. The benchmark Euro Stoxx 600 index rose nearly 3 per cent, although it is still 16 per cent below its late-February highs.
The catch-up in Europe comes as several of the biggest investment banks and fund managers have advised clients to take profits from the dizzying rally on Wall Street and look across the Atlantic.
Investors point to a strong policy response from the European Central Bank and the prospect of a €750bn crisis fund that would allow Brussels to borrow in capital markets and distribute the money to member states.
They also note that the virus is more contained in most of Europe than the US — where the majority of states have seen a resurgence since the end of May — and that the region’s economy is gradually reopening, albeit with localised outbreaks in parts of the UK and Germany. In the US, states such as Texas and Florida have reimposed restrictions.
BlackRock this week upgraded European equities to overweight, arguing that the region was well placed to benefit as the global economy restarted, “against a backdrop of solid public health measures and a galvanising policy response”.
In contrast, the world’s largest fund manager downgraded US stocks to neutral and warned that the “risks of fading fiscal stimulus and an extended epidemic are threatening to derail the market’s strong run”.
Other fund managers have also reported rising interest in Europe.
Willem Sels, HSBC Private Bank’s chief market strategist, said he has seen new enquiries about European stocks in recent weeks from his clients in Asia. “[Europe] is always a very difficult sell — but this has somewhat changed,” he said.
“The rotation we have seen after the last few weeks is looking at things that have been left behind,” he added.
Meanwhile, some veteran traders and economists remain sceptical about the sustainability of a recovery in the US driven by massive central bank stimulus and hopes for a rapid rebound in corporate profits, despite a grim outlook for economic growth.
Nevertheless, US share prices remain buoyed by a broad recovery through the second quarter — the best for the S&P 500 since 1998 — spreading beyond the growth and technology stocks that kick-started the market’s outperformance.
Those early gains were driven by technology giants such as Amazon, Google and Facebook, which “benefited from rising demand for digital solutions during the pandemic and from their cash-rich balance sheets,” said George Maris, co-head of US equities at Janus Henderson Investors.
Analysts note that Europe lacks an equivalent set of big-tech heavy hitters with such a large bearing on benchmark stock indices. But Emmanuel Cau, head of equity strategy for Europe at Barclays, said “the global recovery is on track,” which should boost the region’s equities given their strong international exposure.
“Our economists have become more positive on European growth and our markets team is now more constructive on European assets,” strategists at Goldman Sachs said earlier in June.
The bank said it saw Europe “turning the corner from the corona-crisis” and expected “a sizeable bounceback in activity” following a weak second quarter.
Still, the Wall Street bank warned investors were likely to approach European assets with caution, given “mediocre” growth in earnings.
Some strategists are drawn by relatively attractive valuations in Europe. The S&P 500 now trades at about 21.5 times its constituents’ predicted earnings, compared with 18 times in the Euro Stoxx 600. That compares with their five-year averages of 17 and 15, respectively.
Kasper Elmgreen, head of equities at French asset manager Amundi, said the large rise in European government borrowing to meet the challenge of coronavirus would mean interest rates were held low for the long term, making equities more attractive and supporting growth stocks in particular.
Sebastian Raedler, head of European equity strategy at Bank of America Global Research, sees a further 15 per cent upside for European stocks. He said the rally was likely to continue while the region’s Purchasing Managers’ Indices — measures of the health of manufacturing and services — also recovered from the shock of the pandemic.
“The equity market will rise as PMIs rise,” he said. “There’s just one way to go.”