How long will eurozone equities continue to outperform?


Investors have started to return to eurozone equities and renewed confidence in the region’s growth has helped them to outperform US stocks in recent weeks.

US equities returned 14 per cent in the opening half of 2013, compared with just 2 per cent for eurozone stocks, as America led the global market rally. However, the total return of eurozone equities stands at around 12 per cent since the end of June – which is about double that from the US.

According to August’s Bank of America Merrill Lynch fund manager survey, a net 17 per cent of asset allocators are now overweight eurozone equities – an increase of 14 percentage points since the previous month.

In addition, figures published by European Union statistical office Eurostat revealed that the eurozone has pulled out of its longest recession on record after growing by 0.3 per cent in the second quarter of the year, offering a boost to the area’s stocks.

Fund managers have pointed out that Europe still remains attractively valued after 18 quarters of recession and worries over the ongoing eurozone debt crisis.

Henderson International Income trust manager Ben Lofthouse, for example, has lifted his allocation to Europe from around 25 per cent last year to about 40 per cent today.

“As the US continues its recovery we still find great opportunities there but taking a global view, at the moment, Europe is one area that is also quite compelling,” Lofthouse says.

“The economic picture is stabilising and with the significant de-rating that has occurred over the past five years, numerous companies seem cheap with low expectations for growth.”

However, Capital Economics chief markets economist John Higgins says he is “sceptical” the eurozone will continue to outperform the US, even though the region is “much more attractively valued”.

“We would acknowledge that there is scope for eurozone equities to continue to outperform US equities based on their relative valuations. After all, the cyclically-adjusted price earnings ratio of the non-financial sector is below 15, some 9 points less than in the US,” he adds.

“However, the revival in the relative fortunes of eurozone equities seemingly owes much to a belief that the region’s economy is firmly on the mend. Any further improvement in the eurozone economy is generally likely to be less impressive than in the US.

“And the 0.3 per cent expansion last quarter masked ongoing contractions in two of the region’s large troubled countries, Spain and Italy, where growth is sorely needed. As such, we would not be surprised if the debt crisis flared up again at some point in the next few years.”