Executive Summary
· European stocks feature attractive valuations, analyst and economist pessimism, and an upside price breakout
· Indicators suggest the region is about a 9 months’ lag to the US stock market
· EURUSD is working off trendline support and elevated copper prices pressure the currency pair higher
A European Vacation?
A recent WSJ article detailed how many millennials are suddenly anxious after the run-up in equity and real estate markets. Many of these young(er) people have families, a house, and a career to manage. It can be disconcerting seeing one’s portfolio rise or fall by more than, say, one months’ salary. Blindly investing money into expensive US equities leaves many investors uneasy about future returns. Where else to go? Try a trip to Europe.
Our Weekly Macro Themes (WMT) report highlights important trends investors might not have on their radars. This week’s report analyzes the impressive price action in European stocks and a look at EURUSD, among other topics. The report published last Friday is a must-read for portfolio managers and traders.
Technical Breakout
So what’s going on in Europe? The Euro Stoxx 50 index broke out and now trades at its highest level since the onset of the Great Financial Crisis. For perspective, the S&P 500 busted through its 2007 peak way back in 2013, but the index of blue chip European equities still has about 10% more to climb to reach its 07 peak and 20% to match the dot-com bubble all-time high. But what about the fundamental backdrop?
Chart of the Week: Euro Stoxx 50 Breakout From the 2014-2020 Range
Fundamental Context
We’ve detailed how ex-US markets trade at a much less expensive valuation than large and small cap US stocks—that has been a theme for a few years, but an interesting recent development is an impressive fundamental tailwind from both earnings revisions and economic data surprises.
Pessimism Persists
European company earnings are expected to grow EPS 40% in the coming 12 months while profit margins are forecast to remain near multi-year highs at 8%. Leading economic indicators across the Eurozone point to the highest growth expectations since early 2018 and nearly a 21-year high. After suffering from COVID-related hardships, the continent is finally on the mend. Think of the region as being about 9 months behind the US.
Data Beats
Did you know that Citi publishes an Economic Surprise Index for Europe? Investors know about the US metric, but the Euro Area stands out right now. As US economic data softens versus analyst expectations (the US score recently approached 0 after climbing above 200 in 3Q20), the Euro Area score is above 100. Pervasive pessimism can be an investor’s best friend.
Cheaper than the States
On valuation, we see that Europe features an equity risk premium more than 2% higher than US stocks. What’s more, the region’s forward PE ratio is about 20% cheaper. At a macro level, consider that momentum has been building for value and economically-sensitive sectors, which would benefit Eurozone equities should the theme continue.
EURUSD Finds Support
Finally, a brief note on EURUSD. The currency pair is working off multi-year trendline support. The WMT pack analyzes futures market positioning and how movements in the copper market have been historically important for the Euro. For more information, please reach out or subscribe.
Conclusion
European stocks appear to have many of the same characteristics that the US market had in 3Q20—a positive price trend, stark pessimism from analysts and economists, and supportive monetary and fiscal stimulus. The Euro Stoxx 50’s recent price breakout lends credence to the notion that there is more upside to come.
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