Europe grew faster than the United States last year. Their markets are also outperforming
Stock markets in Europe have beat wall street by the largest margin in more than three decades in recent months, as its economy appears poised to dodge a recession many thought inevitable just weeks ago.
Since late September, European market benchmarks have risen 20 percentage points more than Wall Street, the biggest outperformance seen in a four-month period in the last 30 years.
Although European stocks have posted slightly smaller gains than US stocks in the past two weeks, this has done “little to erode their outperformance since September,” Graham Secker, Morgan Stanley’s chief European equity strategist, told CNN.
The overall rise is a reversal of a 15-year trend in which US stock indices, along with fast-growing tech companies, consistently outperform those on the other side of the Atlantic.
“It had been quite a sharp turnaround and the sharpest in a long time,” Thomas Mathews, a senior markets economist at Capital Economics, told CNN.
In a note earlier this month, Morgan Stanley said the reversal was driven by a combination of falling gas prices and better-than-expected economic data in Europe, as well as China’s rapid reopening.
Similarly, Capital Economics’ Mathews noted that the “consistent outperformance” of European stocks can be traced to a drop in European stocks. wholesale gasoline prices since its historical maximum reached at the end of August. Europe’s benchmark gas contract is now trading at 57 euros ($62) per megawatt hour, well below the high of 346 euros ($375) per megawatt hour.
Consumer price inflation in the region has also eased in recent months. In countries that use the euro, inflation fell from a record high of 10.6% in October to 8.5% in January, preliminary data from the EU statistics office showed on Wednesday.
More generally, investors have been encouraged by Europe’s economic resilience over the past year. Eurozone GDP grew 3.5% in 2022, more than the United States or China, including a slight expansion in the last quarter, according to a preliminary estimate from the EU statistics office.
The International Monetary Fund forecast on Monday that Europe’s annual growth rate will likely slow to 0.7% this year. And GDP may still contract in the current quarter, but the recession risk has regressed
“The eurozone is now likely to avoid a technical recession, defined as two consecutive quarters of negative growth,” Salomon Fiedler, an economist at Berenberg bank, wrote on Wednesday.
The region will benefit from a rebound in demand for European goods and travel in China.
Kasper Elmgreen, head of equities at Amundi, a French asset management firm, told CNN that he is monitoring the impact of china reopening about Europe “very closely”.
“There are 1.4 billion Chinese coming out of lockdown,” he noted. “We have kind of a pattern now, having seen this in other regions, and there’s usually a very significant amount of pent-up demand.”
According to Michael Hewson, chief market analyst at CMC Markets, investors are now better off putting their money to work in Europe. An investor in a tracking fund for the Euro Stoxx 600 can expect to earn a 3.2% return this year, compared with 1.6% for the S&P 500, he told CNN, noting that Europe has more stocks than ” value” than the United States.
Investors have traditionally seen US stocks as “growth” stocks (companies that are expected to expand quickly and make big profits), while European stocks have been seen more as “value” stocks, or stocks that trade at a lower price than they’re worth based on their financial performance.
Over the past decade, investors poured money into fast-growing tech stocks, helped along by ultra-low interest rates. At the time, the Nasdaq was heavy on tech stocks.
(BANK) shot up 300%, compared to Germany’s DAX
(DAX)that only doubled, Hewson said.
Capital Economics’ Mathews noted that “there is no equivalent of Amazon or Facebook [in Europe] …in terms of these massive companies making super profits,” adding that between 2007 and July 2022 investors could expect to earn an annual return of 9.3% from the S&P 500 and just 4.7% from the Euro Stoxx 600.
But technology companies they’ve taken a beating recently. The Nasdaq lost 33% of its value last year as high inflation and interest rate hikes slowed business growth. Tech companies, including Microsoft and Alphabet, announced thousands of layoffs in the past month.
Since the second half of last year, Mathews said, analysts began lowering their earnings forecasts for many US companies as it became apparent that some of the pandemic trends that had people spending most of their time at home they were not being maintained.
A multi-year drop in interest rates had also supported growth stocks, Amundi’s Elmgreen said, adding that the recent outperformance of European stocks marked a “paradigm shift.”
“This is the start of a longer-term trend,” he said.
However, Europe is not yet out of the woods. Although inflation has started to cool, it is still historically high, which could keep interest rates high for some time. High interest rates make it more expensive for companies to borrow to expand their business, raising questions about their future profits.