The current shift in investment strategies indicates a growing belief among investors that Europe is poised to spearhead the next phase of the global equity market surge. This trend is partly influenced by the high valuations of the U.S. market, reminiscent of the dot-com bubble era. Investors are now increasingly exploring options beyond the U.S., seeking new opportunities for growth.
Recent data from Goldman Sachs Group Inc. reveals a historic trend among hedge funds, showing their highest-ever investment exposure to European stocks compared to a global benchmark. This shift in focus underscores a growing confidence in the potential of European markets. Additionally, a survey conducted by Bank of America Corp. has observed that mutual funds have significantly increased their investment allocations to European equities, marking the most substantial rise since June 2020 as reported by Bloomberg.
Paul Brain, serving as the deputy chief investment officer of multi-asset at Newton Investment Management, suggests a solid prospect for Europe to outshine U.S. stocks. He attributes this potential to the fully valued state of major U.S. tech companies, which might face challenges due to increased competition and tighter regulation, especially following their recent market rally.
March saw European shares rising by about 4%, a performance that surpassed their U.S. counterparts. This growth is fuelled by expectations of a rebound in economic growth, which could revive corporate profits. Simultaneously, in the U.S., a fervent interest in artificial intelligence technologies has led to a heavy dependence on a select group of expensive tech stocks, influencing the dynamics of the S&P 500 Index.
The data from Goldman Sachs highlights a significant trend among hedge funds, where there is a 5.8% greater allocation to European stocks compared to the MSCI All-Country World Index. This level is unprecedented, indicating a strong inclination towards European markets among hedge fund investors.
Despite the recent gains in European markets, the Stoxx 600 Index still appears relatively undervalued. Its forward 12-month price-to-earnings ratio is only slightly above its long-term average, suggesting it remains an attractive option for investors. This is in contrast to the S&P 500, where, even excluding the high-value tech sector, the market is seen as being in a state of overvaluation.
Europe's investment appeal is further strengthened by its significant involvement in cyclical sectors. These sectors are expected to benefit as major European economies, like Germany and the UK, are likely to avoid extended recessions. Additionally, as global economic growth accelerates, these sectors could see further benefits. A potential decrease in interest rates could also play a crucial role in enhancing the attractiveness of these sectors.
Peter Oppenheimer of Goldman Sachs voices optimism for the performance of tech stocks but points out more compelling valuation opportunities outside the U.S. He believes that while tech stocks will continue to do well, other markets, especially in Europe, present more attractive investment prospects as we read in Bloomberg.
A notable shift in investor sentiment towards European stocks is evidenced by a substantial decrease in short positions. According to S&P Global, estimated short positions on European stocks have been reduced to less than 0.2% of total market capitalization, the lowest in at least a decade, indicating a more positive outlook among investors towards these markets.
The EMEA iShares team at BlackRock Inc., including experts like Karim Chedid and Laura Cooper, report an uptick in investment flows into Europe, including from U.S. sources. They mention a strategic inclination towards Europe from a tactical momentum perspective, indicating a growing investor interest in the region.
Despite the current tilt towards European stocks, BlackRock's team maintains a long-term overweight position in U.S. stocks. Their strategy hinges on the expectation of continued gains, particularly driven by advancements in artificial intelligence. This suggests a belief in the enduring strength of the U.S. market, despite the current enthusiasm for European equities.
European stocks have consistently underperformed compared to U.S. stocks since the global financial crisis, with only sporadic episodes of outperforming their American counterparts. The most recent significant period of European market strength was between October 2022 and March 2023, during which the Stoxx 600 Index outperformed the S&P 500 by more than 12 percentage points.
Looking ahead to 2024, analysts project a robust earnings growth for U.S. companies, with expectations of an 8.3% increase in profits for firms in the S&P 500. In contrast, earnings for Stoxx 600 companies are predicted to grow by 4%. While this indicates a stronger performance for U.S. stocks, the relatively lower growth rate for European companies suggests there might be room for them to close the gap in market performance.
Nicolas Simar of Goldman Sachs Asset Management sees potential opportunities in the European market. Despite the historical trend of underperformance compared to U.S. stocks, he believes that the current market conditions could unveil attractive investment prospects in Europe, offering a chance for investors to capitalize on these opportunities.
30.03.2024
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