European stockmarkets poised to race ahead

European stockmarkets are being tipped to outperform the US for the rest of the year, and into next year too.

Town in Greece
Europe's recovery package provides extra help for peripheral economies such as Greece
(Image credit: © Getty Images/iStockphoto)

“Global investors have had little love for Europe in the past decade,” says Nicholas Jasinski in Barron’s. “Anaemic” growth and political instability “have kept a lid on European stocks”. Yet with reopening gathering pace, “the near-term case for relative outperformance by Europe now is the strongest in years”. The pan-European Stoxx 600 index ended the first half of the year last week with a 13.5% gain.

Pack your vaccine passport

Last week the EU launched its vaccine passport, providing a shot in the arm for the tourism industry ahead of the summer season. Brussels and London are working on mutual recognition of the NHS Covid Pass. More than half of the EU’s population has now received at least one dose of a Covid-19 vaccine, with countries such as Germany, the Netherlands and Spain currently outstripping the US on this measure.

European data has surprised on the upside recently, says a Morgan Stanley note. The European Commission’s economic sentiment indicator is at a 21-year high. The US has now passed through the fastest phase of its recovery and there is nervousness about the outlook for monetary policy, says Jasinski. By contrast, Europe’s recovery is only just starting. Indeed, it is “one of the few developed regions” tipped to “see better GDP gains in 2022 than in 2021”. On 16.5 times 2022 earnings the Stoxx 600 is also a welcome remedy for US “valuation vertigo”.

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Most investment banks are tipping European markets to outperform the US for “the remainder of the year and into 2022”, says Elliot Smith for CNBC. US fund flows into European stocks so far this year have been the strongest in six years. BNP Paribas’s strategists think easy monetary policy and a broad-based recovery will benefit Europe’s numerous value stocks: the banks, carmakers and energy companies that have been left behind as US tech has soared over the past decade. European shares look well-placed to benefit from the next stage of the recovery, agrees David Brenchley in The Times. Sectors “such as payments, medical technology and green energy” also look promising.

The bull case for Europe extends beyond reopening, says Graham Secker in the Financial Times. Europe’s post-pandemic recovery fund, which has seen member states issue joint bonds for the first time, is a “game-changer”. The fund’s slow rollout has drawn unfavourable comparisons with the much bigger US fiscal stimulus. But while America has created a short-term consumption surge, the European plan is “more focused on longer-term investment” in areas such as digitalisation and provides extra help to weaker peripheral economies. The five-year time horizon should also mean it provides a more consistent tailwind for European equities in the coming years.