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European stocks, historically heavily discounted relative to the US, currently are not as appealing to investors due to growing concerns over slowing economic growth and poor earnings outlooks.
Despite starting the year ahead of S&P 500, Stoxx Europe 600 stocks fell behind by May, losing ground to US stocks in dollar terms for the year. European stock funds saw outflows, reducing investor confidence in the region.
Equity bulls counted on Europe’s nearly record-setting low price-to-earnings ratios to attract interest but are increasingly frustrated as the gap isn’t expected to close anytime soon, as per Wall Street strategists. On the other hand, forecasts from Bank of America and Deutsche Bank have a more bullish outlook on the S&P 500 than European benchmarks, expecting earnings to rise only 6.7% vs. an 11% gain in the US.
Senior multi-asset strategist Marija Veitmane warns that global manufacturing downturn and cyclical exporter markets have put enough weight on European markets to affect their performance for the upcoming years.
Several predictions from investment firms echo Veitmane’s warnings that European stocks might not see gains as strong as those made by the US stocks, with potentially sluggish growth in Europe and the possibility of stocks slumping by nearly 10% by early next year. What’s more, European stock funds have shown consistent outflows and investors are not heavily buying while the main buyers are from Europe from corporate buybacks.
Despite all the bearish sentiment, optimism continues to remain for the region that indicates some European stocks are still attractively priced relative to bonds.
While some argue for a potential deterioration and a 15% slide in the Stoxx 600’s performance midway through the year, others argue that the low valuations in European stocks may be just the right opportunity for investors to reconsider their position on European stocks.
By Farah Elbahrawy and Sagarika Jaisinghani, Bloomberg markets live reporters and strategists
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