European equities have actually performed as well as U.S. stocks this year, and have outperformed EM and Japanese stocks quite significantly. Is this a fluke? Economists at Morgan Stanley think not, and see four reasons why European equities could continue to outperform global peers.
“The economic data across Europe has come in considerably better than expected. Looking forward, one consequence of the initial delay in Europe’s recovery is that there is further room for improvement in some of the key economic indicators over the summer months, in contrast to places such as the US, where arguably much of the good news is now behind us. This analogy potentially extends into next year as well, with Europe set to be the only major region of the global economy where GDP growth should be higher in 2022 than 2021.”
“The European stock market is very global in nature, with European companies also benefiting from the strong growth all around the world. So far this year, consensus earnings forecasts for 2021 have risen by over 5%. While the pace of upgrades will likely slow from here, we do see European earnings rebounding by 50% or so through this year and next, which should equate to a bigger bounce back than seen in other regions.”
“Europe’s so-called ‘unloved’ characteristics mean that the region looks considerably cheaper than global peers and investor positioning is much more muted. Although we think investors have legitimate concerns regarding a high degree of optimism or ‘froth’ in some markets, this isn’t the case in Europe at all – hence the region may prove more defensive than normal if we do see any turbulence or volatility elsewhere.”
“The European Recovery Fund should get the green light soon. These monies should both boost the underlying economic growth, especially in the periphery, and further reduce political risk premium. If this, in turn, piques investor interest back towards the region, then this could be a powerful catalyst for further outperformance ahead since global flows are often a key marginal driver of European equity performance.”
