Prospects for lagging European equities look rosier
Strong earnings and economy plus cheap valuations cheer bulls but beware bond tantrum
Eurozone stocks have started the year charging to 2½-year highs on Europe’s Stoxx 600 but remain a good investor test of “glass half-full or half-empty”.
Gains of more than 3 per cent on Europe’s benchmark this year don’t look quite as impressive when compared with the near-5 per cent on the S&P 500 and the more than 7 per cent on Hong Kong’s Hang Seng index.
These are a repeat of 2017 trends when the Stoxx 600 gained almost 8 per cent over the year but trailed the S&P 500’s 19 per cent and the Hang Seng’s blockbuster 35 per cent.
The eurozone lag is most commonly blamed by analysts on a buoyant euro, given the highest proportion of European company sales outside the currency area are in the US and getting paid in depreciating dollars.
But Nick Nelson, UBS head of European equity strategy, forecasts 11 per cent gains for eurozone stocks this year, with strength in cyclicals such as autos, commodity stocks and banks making those sectors the top three performers in 2018.
Earnings momentum remains strong, economic indicators such as the composite PMI are at seven-year highs and forward p/e valuations look cheap. Mr Nelson sees under-geared balance sheets providing good prospects for an upsurge in M&A.
But there are risks. A precipitant rise in US yields, he notes, could repeat the 2013 taper tantrum that produced only a 3 per cent move down for the S&P but a 10 per cent correction for the “high beta role” (more volatile, riskier) played by European stocks.