European shares have been on the rise for seven months, outshining their U.S. counterparts, and are now just 6% below their record high. Yet the region’s companies are running out of puff, writes guerreraf72
The makeup of European equity markets also played a large role. Nearly 40% of the region’s stock market consists of so-called cyclical stocks, such as banks and industrial firms, whose fortunes tend to rise and fall with the economy. That compares with just 22% in the United States, according to JPMorgan. The current environment of high inflation, elevated interest rates and slow growth favours these companies, by enabling them to charge more for their products and services.
This supportive environment lured investors to Europe after years of indifference. What they found was a treasure trove of relative bargains. Even after the recent run, Europe’s shares trade on a multiple of 12.7 times next year’s expected earnings, according to IBES estimates, which is a 30% discount to U.S. valuations.
Sharp monetary tightening will slow growth to a trickle, dampening demand and curbing spending by households and companies. The ECBthe euro zone economy to expand by just 1% in 2023, compared with 3.6% last year. For both 2024 and 2025, the central bank projects a modest 1.6% rise in GDP. Higher rates and banking stresses will also make it more difficult and expensive for companies to access capital.
Some investors are already taking their business elsewhere. Europe-focused equity funds have suffered six consecutive weeks of outflows, according to Bank of America. Europe-focused actively-managed funds have seen total outflows of more than $18 billion in 2023 but that has been partially offset by $15.6 billion of inflows into passive funds that invest in the region.
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