Europe Lacks Everything Needed to Make Its Stock Market a Winner

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“As long as there is no clear normalization of shipping through the Strait of Hormuz, Europe should carry a higher risk premium given its greater exposure to imported energy and renewed inflation pressure,” said Andrea Gabellone, head of global equities at KBC Securities. 

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Monetary policy is also in focus. Last year, stocks got a boost when the European Central Bank slashed interest rates more aggressively than the Federal Reserve. That dynamic may now reverse, with traders expecting the ECB to hike borrowing costs three times this year while the Fed keeps rates steady. 

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There’s a risk that inflation and higher rates combine to hit economic growth, which had been expected to pick up from relatively low levels on increased spending from Germany’s €500 billion infrastructure fund, as well as European Union outlays on defense and the bloc’s recovery from Covid. 

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“The widening ‘growth gap’ between Europe and its global peers is increasingly seen as structural rather than cyclical,” said Kemper.

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Diversified and Cheaper

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The rallies in the US and Asia have been narrow, with the most impressive gains coming from a small number of AI-related stocks. By contrast, the European market is more diversified, with a broader sector exposure that could play in its favor if there’s a reversal in the tech frenzy. European stocks are also cheap.

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Yet those arguments don’t appear to be swaying investors.

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For HSBC Holdings Plc chief multi-asset strategist Max Kettner, heavy concentration in tech stocks isn’t a problem. The exposure indicators he tracks are still far away from sending a sell signal. Meanwhile, Europe is firmly on the sidelines.

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“I think it’s an everywhere story, except Europe,” he said. “The problem with Europe right now, at least tactically, is you’re sitting in the middle like ‘I really need Hormuz to reopen, I really need this Middle East conflict to end, then I can buy banks again, maybe some of the cyclicals, maybe even consumer stocks.’”

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When it comes to valuations, European stocks are trading at a discount to US peers both broadly, and within specific sectors. With a forward price-to-earnings ratio below 15, the Stoxx Europe 600 offers a 30% discount to the S&P 500. That compares with a 20% average discount over the past 20 years. 

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One potential explanation for why European stocks appear inexpensive is that headwinds are already factored into prices. 

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“This argument seems to be missing the point as Europe lacks the earnings velocity found in the US. Without a sector catalyst like AI to drive multiple expansion, low valuations are reflecting long-term stagnation rather than a buying opportunity,” said Kemper of BNP Paribas.

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The lack of enthusiasm leaves European stocks as a way to gain some portfolio diversity, and regional companies as potential M&A targets given their lower valuations. For Molavi, there is at least one silver lining. 

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“Things are getting so bad that Europe might, as a construct, wake up and start to move fast and break things,” he said.

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—With assistance from Jan-Patrick Barnert, Levin Stamm and Olivia Levieux.

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