Rising European stocks are making investors reconsider

“Time to Buy Europe” is one of the toughest, perennial commercial ideas that somehow never quite works.

It’s an absolute certainty that every few months there will be a strategy note or article outlining why investors think now is the time to invest in Europe, and shortly thereafter European stocks will crash.

I know because I have described this myself several times. In an example from July 2021, fund managers spoke warmly of positive corporate earnings revisions in the Eurozone, the recovery from the Covid shock, and the softer interest rate outlook across the Atlantic. Among other things, they justified the already significant march since the outbreak of the epidemic.

They weren’t wrong. By early 2022, the Stoxx 600 was about 8 percent higher. The problem was, no one saw that Russia’s invasion of Ukraine would shift the course. By the end of last year, the shares were about 6 percent below their initial value.

The outbreak of the war was an external shock, to say the least. No sane fund manager could have expected it last summer. But global investors could be forgiven for thinking that Europe isn’t worth the trouble.

The US S&P 500 had a rough 2022, that’s for sure. But it’s still up more than 50 percent over the past five years. No major European index can come close to this. Looking at the dollar-based MSCI indices, in order to remove the currency effects from the comparison, the MSCI Europe is up a meager 5 percent, while Germany is down 13 percent. France’s 17 percent profit is decent, but not as big as the US.

Still, you no doubt see where this is going and are already asking yourself: is it time to buy Europe?

At the risk of tempting fate, many investors think so. In fact, the best strategy is to jump into a time machine, jump back to October, and buy at the point when risk markets around the world turned higher for reasons that analysts are still debating. The Euro Stoxx 600 index rose about 20 percent from that point.

If your time machine is malfunctioning, you’re faced with a slightly more complicated task. This is already proving to be a world-beating asset class by 2023.

This scintillating performance is very different from what investors and analysts expected. Underweight positions or outright negative bets were an overwhelming consensus call for 2023, and fund managers stayed away.

But a few things went wrong with it, and with Europe.

One is the weather. We’re all amateur meteorologists today and point out that Europe didn’t freeze into a recessionary energy crisis over the winter, as economists thought. This is obviously not a very reliable long-term macroeconomic factor. “Winter happens every year,” as Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, pointedly points out. “Warm weather helped avoid a huge recession, and that’s not a good thing to have in the hat.” Nevertheless, this year he succeeded.

The mysterious global rise in global stocks also clearly helped. But arguably the biggest impetus came from China. The faster-than-expected exit from zero-Covid policies has accelerated across Europe, increasing demand from cars to the German heavy industry sector to French and Italian luxury companies. It also helped lubricate the supply chains needed for European manufacturing.

The German Dax is close to record levels. The French CAC 40 set a record – just – at the beginning of the month. Italy did not break new ground, but its index is at the strongest levels since the 2008 financial crisis. MSCI’s European luxury index has gained 17 percent so far this year, and almost 50 percent since October. European bank stocks – one of the most fervently avoided sectors in the world since the region’s debt crisis – are nowhere near their prime, but are up 18 percent this year now that interest rates are back in positive territory.

Claudia Panseri, a strategist at UBS Wealth Management, is among those who feel this must continue. “People have reconsidered,” he says. “Everyone was so negative at the end of last year, expecting an energy crisis and huge pressure on revenues.” Now new money is coming from institutional investors, including some from the United States, to Europe, where valuations are much lower, he says.

Scaled down a bit, this reflects one of the key foundations of the theme. One of the reasons the US has underperformed Europe in market performance for decades is its weight in technology, including stocks of loss-making companies, which made sense for some investors, at least while returns from safer assets were few, if any. Investors were willing to wait for profits to arrive later. High inflation and aggressive interest rate hikes put an end to that. According to Panseri, technology valuations are questionable and “a lot of people want to reduce exposure to the growth sector.”

Slow and steady has long been Europe’s selling point, but it never really worked in the age of easy money. At least now there’s a chance it’ll stick.

[email protected]