The focus on Europe comes as the region’s benchmarks have kept pace with their US counterparts after years of underperformance. The STOXX 600 is up 10.7% year-to-date, largely matching the S&P 500. The S&P 500 was down 1.7% from its high on Thursday, while the European index slipped 0.8% from its peak.
“We have been more exposed to the United States over the past few years and are now more interested in foreign stocks,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company.
Investors see an opportunity as the recovery in Europe begins to take hold as the US economic growth rate is expected to peak soon. European indices are also more heavily weighted in the types of stocks that should perform particularly well as the global economy rebounds, such as financials and industrials.
“Vaccinations are advancing, you will probably see restrictions lifted and that should mean a decent economic recovery that will bleed in the eurozone markets,” Schutte said.
After contracting in the first quarter, the eurozone’s gross domestic product is expected to increase in the second quarter and post its fastest growth in the third, growing 9.2% on an annualized basis, according to Oxford Economics. US GDP, meanwhile, is expected to peak at 13.3% growth in the second quarter, after increasing in the first quarter.
Meanwhile, nearly 48% of the U.S. population had received at least one dose of the vaccine on Wednesday, compared to nearly 28% of the European population, according to Our World in Data https://ourworldindata.org/covid-vaccinations.
“The story for the first few months of this year has been around American exceptionalism,” said Mona Mahajan, senior US investment strategist at Allianz Global Investors. “As we look to the next three to six months, that could fade a bit, especially if Europe continues to catch up.”
Many European stocks are also trading at relative discounts to their US counterparts. The S&P 500 is trading at nearly 21 times forward earnings, compared to 16.7 times for the STOXX index, according to Refinitiv Datastream – a larger spread than the 10-year average, although that difference has recently narrowed .
Part of the spread stems from the fact that the US indices are more heavily skewed towards technology and other growth stocks which tend to post higher valuations. These stocks have helped propel the US stock market since the financial crisis a decade ago and helped push the S&P 500’s performance ahead of European markets, but could fall out of favor as bond yields rise and fears inflation reduced their valuations.
Several factors could complicate the decision to turn to European stocks. As tech and internet giants like Apple and Amazon continue to post strong profits, investors may be reluctant to cut back on a trade that has worked for years.
While inflation fears have hit US stocks in recent weeks, there are also concerns about eurozone inflation, which is approaching 2%, its fastest rate in years.
Any setback in Europe’s response to COVID-19 and the economic rebound could also undermine the case for actions there, investors said. The same could be true of a reversal of the recent weakening trend in the dollar, which would hurt US investors seeking to convert profits from their euro-denominated assets back to their national currency. The dollar has fallen about 4% against the euro since early April.
“The next step that we will probably take will be to downsize the United States and increase the international just because of the forces we see in the market,” said John Traynor, chief investment officer of People’s United Wealth Management at Bridgeport. , Connecticut. But, added Traynor, “when the dollar goes up, it hurts you if you invest internationally.”
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Marguerita Choy)
