Europe Leading the World
The Euro Stoxx 50 Index of eurozone blue-chips is up 13% so far in 2021, outperforming the S&P 500 in the opening five months of the year for the first time since 2017 and topping all other major regional benchmarks.
The Euro Stoxx 50 Index trades at about 17.6 times 12-month earnings, compared with 21 times for the S&P 500, and 26 times for the Nasdaq. Unlike most global indexes, it has yet to reach its record high or even surpass its 2008 peak.
What makes Europe so attractive right now is the vast presence of cheap sectors sensitive to an economic recovery being hastened by a ramp-up in vaccination efforts that initially trailed the U.S. and U.K. The region is also less susceptible to the inflation worries that have spooked markets of late, given a relative dearth of the worst-hit sectors such as technology.
According to Bank of America and EPFR Global data, European equity funds have attracted inflows over the past six weeks. Yet there’s still a long way to go to catch up with peers. For 2021 to date, the region has attracted just $4.8 billion compared with a whopping $181 billion plowed into U.S. equity funds. Last year, investors pulled about $43 billion from European stock funds, the most among major regions.
The U.S.-listed SPDR EURO STOXX 50 ETF is set for its biggest month of inflows since 2017 with about $300 million new additions in May, while the iShares MSCI Eurozone ETF this week had its largest single-day inflow of $187 million since October 2019.
Kevin Thozet, member of the investment committee at Carmignac, says the European market is in a “sweet spot” due to its balance of cyclical and quality names, such as luxury companies, which represent a large part of the index.
“The big attraction in the U.S. was, for a very long time, the technology sector. There are tech companies in Europe, but they aren’t as important. This didn’t help European equities in the past, but there’s a rotation in place right now and Europe benefits,” Thozet said in an interview.
Fiscal and monetary stimulus, along with a rebound in consumer spending, should enable economic activity in the euro area to return to pre-Covid levels by late 2021, according to Wei Li, global chief investment strategist at the BlackRock Investment Institute. BlackRock lifted euro-area equities to neutral in February and prefers them to the European credit market.
“In addition to a more positive macro backdrop, we see valuations in the euro area as supportive,” she said by email. “We still expect a rapid activity restart beginning in the second half of this year.”
Reference
Bloomberg, 2021-05-22, “World’s Best Rally Has Morgan Stanley to Newton Eyeing Europe”
