“Time to buy Europe” is one of the hardiest perennial trade ideas that somehow never properly takes off.
It is a nailed-on certainty that every few months, strategy notes or articles will appear outlining why investors think now is the time to invest in Europe, and not long after that, European stocks will tank.
I know because I’ve written this several times myself. In a July 2021 example, fund managers spoke warmly of the euro area’s positive corporate earnings revisions, its recovery from the shock of Covid, and a tamer outlook for interest rates than on the other side of the Atlantic. Among other things, these were cited as reasons to add to the already substantial rally that had been running since the initial outbreak of the pandemic.
They were not wrong. By the start of 2022, the Stoxx 600 was about 8 per cent higher. The problem was: no one saw Russia’s invasion of Ukraine coming to knock it off course. By the end of last year, stocks were some 6 per cent below the starting point.
The outbreak of war is, to put it mildly, an exogenous shock. No sensible fund manager could have anticipated it in the previous summer. But global investors can be forgiven for thinking Europe is just not worth the bother.
The US S&P 500 had a rough 2022, for sure. But it is still up by more than 50 per cent in the past five years. No major European index can come close to that. Looking at dollar-based MSCI indices to strip currency effects out of comparisons, MSCI Europe is up a paltry 5 per cent, while Germany is down 13 per cent. France’s 17 per cent gain is decent, but not on the same scale as the US.
Still, no doubt you can see where this is going, and you are already asking yourself: is it time to buy Europe?
At the risk of tempting fate, a lot of investors think it is. In fact, the best strategy is to hop in a time machine, scoot back to October, and buy at the point when risky markets all over the world turned higher for reasons that analysts are still arguing about. The Euro Stoxx 600 index is up by about 20 per cent from that point.
If your time machine is malfunctioning, you face a somewhat trickier task. Already, this is proving to be a world-beating asset class for 2023.
This sparkling performance is very much not what investors and analysts were expecting. Underweight positions or outright negative bets were an overwhelming consensus call for 2023, and fund managers were staying away.
But a few things have gone wrong with that, and right with Europe.
One is the weather. We are all amateur meteorologists now, sagely noting that Europe did not get frozen into a recessionary energy crisis over the winter as economists had feared. This, obviously, is not a particularly reliable long-term macroeconomic factor. “Winters happen every year,” as Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, drily points out. “The warm weather contributed to the lack of a massive recession and that’s not a great thing to hang your hat on.” Still, it has worked this year.
The puzzling global ascent in global stocks has also clearly helped. But arguably the biggest boost has come from China. Its speedier-than-expected exit from zero-Covid policies has fanned across Europe, lifting demand for everything from cars, to Germany’s heavy industrial sector, to the luxury stalwarts of France and Italy. It has also helped to lubricate the supply chains that European manufacturing needs.
Germany’s Dax is close to a record high. France’s CAC 40 hit a record — just — earlier this month. Italy has not broken new ground, but its index is at some of the strongest levels since the financial crisis of 2008. MSCI’s European luxury index has gained 17 per cent so far this year, and nearly 50 per cent since October. European bank stocks — one of the most avidly avoided sectors on earth since the region’s debt crisis — are nowhere close to their glory days, but they are up 18 per cent this year now that interest rates are back in positive territory.
Claudia Panseri, a strategist at UBS Wealth Management, is among those who feel this has further to run. “People have been rethinking,” she says. “Everyone was so negative at the end of last year, expecting an energy crisis and huge pressure on earnings.” Now, new money is coming in from institutional investors, including some switching out of the US and in to Europe, where valuations are much lower, she says.
Zooming out a little, that reflects one of the key foundations to this theme. One of the reasons the US has trounced Europe in market performance for decades is its heavy weighting towards tech, including shares in lossmaking companies that made sense to some investors, at least while returns on safer assets were tiny, if they existed at all. Investors were willing to wait for profits to land later. High inflation and aggressive rises in interest rates have put a stop to that. Now, says Panseri, tech valuations are under question and “a lot of people want to reduce exposure to the growth sector”.
Slow and steady has long been Europe’s selling point, but it never really worked out in the easy money era. Now there’s at least a chance it will stick.