European stockmarkets will bounce back
Last year was one to forget for European stockmarkets. But 2021 should prove better.
Investors in Europe are hoping that 2021 proves a duller year than 2020. Last year was one to forget, with the pan-European Stoxx 600 finishing down by 3.8%. The pain was not evenly shared. Spain’s IBEX finished the year down almost 15%, with France’s CAC falling by 7.1%. More happily, Germany’s Dax delivered a positive total return of 3.5%.
The MSCI Europe index, which includes British shares, posted its worst annual performance since the 1980s relative to the world average last year, says Morgan Stanley in a research note. European earnings may have fallen by 33%, more than double the global average of 15%. But a strong cyclical recovery is likely to take hold later this year, triggering a multi-year surge in profits. That should feed into stock prices, which closely track earnings trends – in 2004-2005, the last time the region enjoyed two successive years of 20%+ profit growth, the MSCI Europe index returned 33%.
European stockmarkets are a decent bet
The underperformance of European markets has little to do with geography and almost everything to do with sectoral make-up, says Richard Cookson on Bloomberg. Around 28% of large-cap US stocks are technology firms. In Europe that figure is 7%; in the UK it is just 1.5%. Almost 4% of the European market is made up of beaten-down energy stocks, compared to 2% in America. Indeed, if you correct for sectoral weighting, European and American stocks would have “pretty much the same valuation”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Surging tech stock prices and the rout in the energy sector have “whittled away” at that problem, says Buttonwood in The Economist. Tech firms now account for 14% of the Euro Stoxx 50, an index of eurozone blue-chips, making it the continent’s biggest sector.
That said, the case for European shares still rests squarely on the outlook for those hated “old-economy cyclical stocks” (banks, energy and industrials). A post-pandemic reflation trade should help them outperform over the next two years.
My worry is that we will get an inflation spike in major economies later this year, says Cookson. That could scare central bankers into hiking interest rates. If that happens then pricy US stocks would feel most of the pain, but European cyclicals would not be spared.
If interest rates and the dollar do rise, then European equities look better than the alternatives, says Buttonwood. Tighter global monetary policy would be especially painful for emerging markets, leaving Europe the “sounder bet”.
Fortune will “favour the brave” for European equity investors in 2021, says Rodney Hobson for Interactive Investor. The key is to look for “solid, boring companies that can stand the shutdowns” and are ready to profit once the recovery begins.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Alex Rankine is Moneyweek's markets editor
-
US election: Trump is back - what does it mean for your money?
Trump is back, but what does his election victory mean for your money and which stocks are tipped to do well?
By Kalpana Fitzpatrick Published
-
M&S smashes profit expectations on the back of strong food sales
Marks & Spencer’s half-year profits rose 17.2% to £407.8 million, well ahead of the £359 million analysts were forecasting
By Chris Newlands Published
-
Invest in Hilton Foods: a tasty UK food supplier
Hilton Foods is a keenly priced opportunity in an unglamorous sector
By Dr Matthew Partridge Published
-
HSBC stocks jump – is its cost-cutting plan already paying off?
HSBC's reorganisation has left questions unanswered, but otherwise the banking sector is in robust health
By Dr Matthew Partridge Published
-
Lock in an 11% yield with Sabre
Tips Sabre, a best-in-class company is undervalued due to low profits in the motor insurance industry. Should you invest?
By Rupert Hargreaves Published
-
Byju’s – the startling rise and fall
India’s educational technology start-up Byju's attracted big-name backers and soared to vertiginous heights during Covid. It has now plummeted. What happened?
By Jane Lewis Published
-
Shares in luxury goods companies take a hit – will they recover?
Luxury goods companies have run into trouble, and the odds of a rapid recovery have receded. What next?
By Dr Matthew Partridge Published
-
A bull market on borrowed time
While the US enjoys a bull market, it may not last. Will the US rate cut push stock prices down?
By Alex Rankine Published
-
What will a broken-up Google look like?
The US courts have ruled that Google is a monopoly, leaving it facing the prospect of a break-up. WIll that be a good thing?
By Matthew Lynn Published
-
How will the UK gambling sector be hit by the Budget?
There are concerns for the UK gambling sector in the lead-up to the Autumn Budget. What could be on the cards?
By Dr Matthew Partridge Published