European stocks: Taking the lead?

Written by: Global Thought Leadership | April 21, 2017
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Source: Bloomberg, as of 4/14/17. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The Bottom Line

  • After lagging U.S. equities for most of the year, European stocks pulled ahead in early April. 
  • As of April 14, the Europe Stoxx 600 Index sported a total year-to-date return of 7.15% compared with just 4.18% for the S&P Composite 1500 (used here to provide a fair comparison with the multi-cap Stoxx index) in U.S. dollar terms.1
  • March was a particularly solid month for Europe relative to the U.S. as a weaker euro, declining expectations of a rate hike by the European Central Bank (ECB), and improving global economic growth helped fuel gains.
  • Currently trading around $1.06, the euro is well below its 12-month high of $1.15.   That weakening in the currency comes at a time when global growth is picking up, and is especially beneficial to Europe given the region’s export orientation.
  • The interest rate differential between the U.S. and Europe is also changing. The U.S. Fed appears to be moving forward with higher rates—in fact, Fed chair Janet Yellen recently indicated that the era of stimulative monetary policy in the U.S. is coming to an end.
  • Meanwhile the ECB remains biased toward accommodative monetary policy. That said,  the ECB does believe the threat of deflation has passed—year over year, inflation has improved to a rate better than 1.5% on average so far this year from levels near zero last year.
  • In addition, higher inflation and promising economic data have helped boost corporate revenue and earnings expectations. For example, the Eurozone manufacturing PMI for March rose to 56.2, the highest level since April 2011; and capacity utilization at the region’s factories rose to 82.5%, above the long-term average of 82.3%)
  • And with growth picking up analysts just raised 2017 estimates for European companies for only the second time in a decade.
  • All of these factors could spark renewed interest among investors in European equities—aided, perhaps, by lingering concern about U.S. equity valuations: at the end of March the forward price-to-earnings (P/E) ratio of the Europe Stoxx 600 Index was 14.3x compared with 16.5x for the S&P Composite 1500.

 


1 Source for all data is Bloomberg, as of 4/14/17.

 

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