Europe Is Still In The Throes Of Covid-19, But Its Stocks Are Rallying
Certain shares surge as investors look for beaten-down stocks.
3 min
European stocks have been on the rise as international investors reposition their portfolios for the global economy to return to normal—a trade that hinges on smooth reopenings in the region.
The pan-continental Stoxx Europe 600 index has gained 4.5% so far this month, pulling ahead of major U.S. gauges, and on Friday hovered close to its highest point in more than a year. The S&P 500 has added 3.5% in the same period and the Russell 2000, an index of small-cap U.S. companies, has increased 6.9%. The Nasdaq Composite has gained 1% so far this month.
Analysts say this is due to a rotation from growth to value stocks: Investors have been snapping up shares of companies hit hard by the pandemic and selling those that benefited from stay-at-home orders. Europe is emerging as a beneficiary of this trade, which banks on a strong economic rebound.
“Europe is predominantly a value market, the U.S. is predominantly a growth market,” said Kasper Elmgreen, head of equity investing at Amundi. “This rotation benefits Europe disproportionately.”
Value stocks are thought to be trading below what they are currently worth. They are typically in established industries and pay dividends, and include banks, energy and industrial companies, which are also more sensitive to the economic cycle. Growth companies are younger and perceived to be innovative, with potential to do well in the future, such as technology.
But delays to the European Union’s procurement of vaccines is likely to result in its member states keeping social-distancing and travel restrictions in place for longer than countries that are inoculating their populations faster, such as the U.S. and Israel. This might mean that Europe’s economic rebound is slower and weaker. Italy reimposed stricter curbs in several regions last week and plans to lock down nationally over Easter.
“We are finding a little bit more opportunity outside of the U.S. [Value stocks] look cheaper and more undervalued overseas,” said Brent Fredberg, director of investments at Brandes Investment Partners in San Diego. “Now you’ve still got a long way to go in many of these companies, even though they’ve rallied hard.”
A key reason for Europe’s recent strong stock-market performance is the composition of indexes. The Stoxx Europe 600 is more heavily weighted toward industries that are considered to be value, such as financials at 17%, industrials at 16% and energy companies at 5%. Its weighting for technology and communications is 10%, compared with 37% for the S&P 500.
Amundi’s Mr Elmgreen has bought shares of European auto makers and companies that produce construction materials recently, and said he is “significantly underweight” U.S. tech, meaning he owns less than the benchmark he tracks.
Another driver of Europe’s performance is the bond market. The sense of optimism about economic growth has also driven fund managers to dump safe-haven assets such as sovereign debt, causing yields to rise and prices to drop. Government bond yields are used as a reference for the cost of debt in the broader market, including loans to companies. That rise in yields implies higher financing costs, benefiting lenders.
European banks have been among the best performers so far this year. Investors have been expecting the recent rise in yields to improve their net interest income, a key source of revenue. French bank Natixis SA has surged 47%, while Amsterdam-based ING Groep NV and Spain’s Banco de Sabadell SA have both risen 32%.
The Vanguard FTSE Europe ETF is up 5.6% for the year and the iShares Europe ETF has also risen 5.5%. Another iShares ETF that invests in European financial firms has climbed 12%.
Companies in sectors still curbed by government restrictions have also jumped. German travel company TUI AG is the biggest winner on the Stoxx Europe 600 this year, soaring 56%. International Consolidated Airlines SA has added 39% and InterContinental Hotels Group PLC has risen 15%.
But whether these gains are justifiable is still a question, according to Simon Webber, a portfolio manager at Schroders with a focus on global equities. “Travel has fundamentally changed, people are used to working productively, meeting and supporting customers remotely,” he said. Aviation stocks in particular “will be heavily scrutinized,” he added.
He has increased his holdings of European banks, but is also looking at buying more growth stocks such as electric-vehicle companies.
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But leading Australian economist says there are five reasons for investors to be optimistic about the future
3 min
A 291-point or 3.69 percent dive in the benchmark ASX 200 index over April has all but wiped out the Australian share market’s gains for 2024. There was a 140-point or 1.81 percent drop in the ASX 200 on Monday and a minor further fall yesterday. The Australian market has followed the US lead this month, with the S&P 500 also down significantly, losing 232 points or 4.42 percent since 1 April.
The catalysts include last week’s hotter-than-expected US inflation data. Although analysts think Australian inflation is unlikely to follow suit, stickier-than-expected inflation in the US may delay the first interest rate cut by the US Federal Reserve. As the US is the world’s largest economy, this may have implications for central bank decisions in other nations like Australia.
“ … uncertainty over when the Fed will start to cut rates has been increased by three worse than expected monthly CPI inflation results in a row …,” said AMP chief economist Dr Shane Oliver. “This has seen money market expectations for 0.25 percent rate cuts this year scaled back from seven starting in March this year to now less than two starting in September. And in Australia they have been scaled back from nearly three starting in June to no rate cut until late this year/early next.”
On top of that, Iran’s retaliatory strike on Israel and Israel’s insistence that a response will be forthcoming despite many Western nations’ objections have made investors nervous. If Iran were to become more involved in the ongoing war, this may have ramifications for oil prices.
“Another sharp spike in oil prices would be a threat to the economic outlook as it could boost inflation again … potentially resulting in higher than otherwise interest rates and act as a tax hike on consumers leaving less to spend on other things,” Dr Oliver said.
Also, in Australia, the pandemic savings buffers people have been using to cope with the cost of living crisis are being depleted and China’s weak property sector is impacting demand for iron ore. All of this makes shares vulnerable to a pullback amid stretched valuations and more trading volatility ahead, Dr Oliver said.
On balance though, Dr Oliver thinks an upward trend is likely to remain for shares. “From their lows last October, it has been relatively smooth sailing for shares – with US shares up 28 percent, global shares up 25 percent and Australian shares up 17 percent to recent highs.”Dr Oliver said the past few weeks have “seen a rough patch” but the share market is likely to continue its bull run.
Markets have been strong since November 2023 due to falling inflation and optimism that the interest rate cycle is at its peak. Many economists have expressed surprise that the jobs market in many Western countries has remained strong despite weaker economic conditions. Some are terming this “immaculate disinflation” because it goes against the traditional trend of many people losing jobs when economies slow down.
Dr Oliver says there are five reasons to be optimistic about the share market’s strength:
In this climate, Dr Oliver recommends that investors stick to an appropriate long-term investment strategy and accept that share market pullbacks are “healthy and normal”.
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