Cyprus Mail

European stocks are on the comeback trail

The German share price index DAX graph is pictured at the stock exchange in Frankfurt

For some years now, institutional investors have been ‘bla’ about European stocks. Not bad, not great…

…But no longer. And that means it’s time to think about putting some money back into the stock exchanges – whether you prefer Frankfurt or London or even Milan is up to you.

BlackRock, the world’s largest asset manager, has just come out with a report that “upgrades European stocks.”

Its language is somewhat technical: “”The region (Europe) is exposed to a cyclical upside as the economy restarts, against a backdrop of solid public health measures and a galvanising policy response,” BlackRock said in its mid-year outlook.

Morgan Stanley strategist Graham Secker agrees. He told Barron’s that the region could be viewed differently by investors if the economic recovery plans proceed and support the economic recovery over the coming years, as it would lower the risk premium that has plagued eurozone assets.

“It could also signify a shift to a more assertive and dynamic approach to policy-making,” Secker wrote in a client note. “If this proves to be the case, it could mark something of a turning point for investor perceptions toward the region (which are currently very low) and encourage greater investment.”

Essentially, the major investors are impressed by Europe’s policy response to the pandemic – and it is most unusual for investors to react to European policy.

The European equity market has outperformed the US equity market for three consecutive weeks. Is this significant? Can this continue? We think so.

“Looked at from a range of perspectives, including valuation levels and geographical market rotation, we believe European stocks offer a compelling opportunity for long-term investors – particularly in contrast to US equity markets. Collectively, Europe, including the UK, represents about 67 per cent of the MSCI EAFE Index, notes Christopher M Dyer, Director of Global Equity and Portfolio Manager at Eaton Vance Advisers International.

“Notably, European and Japanese markets are more value oriented and cyclical compared to the US equity market. As the global economy continues to reopen following the Covid-19 crisis, the export-oriented nature of the European and Japanese economies makes them well-positioned to benefit. Finally, forward-looking valuations also favour international equities – Europe is trading at roughly a 20 per cent discount to the US, while the discount in Japan stands at around 25 per cent.3 This is an attractive point for diversifying a portfolio with international exposure or increasing an existing allocation,” Dyer says.

In a note to clients, Mark Haefele, chief investment officer for UBS Global Wealth Management, said he preferred German and European industrials as a way to benefit from that recovery.

Certainly, Europe’s economy is beginning to perform well.

Recent data have shown glimmers of a recovery. June’s flash purchasing manager’s index data, a gauge of activity in the services and manufacturing sector in the region, coming in stronger than expected last week. For those who think a global recovery is in the making – however uneven – Europe also offers more cyclical stocks likely to benefit.

Many stocks are undervalued at the moment, but it is important to compare current valuations with historic highs, and then to determine whether the company has enough push to outperform and force that stock price higher.

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