After U.S. stocks, European stocks have set another milestone. The Euro Stoxx 600, the most widely listed stock index in Western Europe, hit a record high on the 6th, having recovered all the losses caused by the outbreak, months after the S&P 500, but also well ahead of expectations.
This brings up a long-standing question. So far this year, the U.S. stock market has led the EU stock market, is it time to go to Europe to “find the good stuff”? And is there a chance for the euro to rebound? Here we answer from three aspects.
European stocks and U.S. stocks side-by-side comparison
It is true that the P/E ratio of U.S. stocks is much higher than that of European stocks, thanks to FANG technology giants such as Apple. But even excluding the tech and telecom sectors, the rest of the S&P still has a higher expected P/E ratio than the Stoxx, and this premium has widened since the outbreak.
The P/E ratios for European stocks are lower than pessimistic earnings expectations, but data analysis suggests that things are not that simple.
HOLT, Credit Suisse’s leading stock analysis and valuation tool, uses a cash-flow return-on-investment approach that accurately calculates profitability from company accounts, suggesting that there are more “bargains” in U.S. stocks. Indeed, according to HOLT’s calculations, the booming technology and pharmaceutical sectors account for a much larger share of economic profits in the U.S. than in Europe or Japan, which makes the entire U.S. stock market look more expensive.
However, a look at the cheapest 20% of stocks in the U.S. and Europe shows that U.S. stocks tend to be more profitable. In other words, they reflect a truer value.
And, despite the overall size of the U.S. market, U.S. companies account for nearly half of the lowest-cost developed country companies, according to HOLT’s statistical methodology. Compared to the pre-outbreak period, U.S. companies account for a slightly higher percentage of cheap stocks. All of this suggests that European stocks are no cheaper than U.S. stocks.
Looking at the euro from a manufacturing perspective
If we look at it from a macro perspective, the picture is different. Especially for Europe’s troubled banking sector, the macro environment seems to dictate everything. the sovereign debt crisis that swept through the eurozone 10 years ago was the result of weakness in the banking sector.
Mathieu Savary, chief European investment strategist at BCA Research, said that when German government bond yields fall (as they have in recent years), as well as when the euro falls against the dollar, bank stocks also fall, although the relationship between the euro and bank stocks is not as tight.
This means that EU banks should play a good linkage in terms of reflation. If the economy comes back to life and German government bond yields rise, this should be a good thing for banks as well as many other European stocks. So where does the euro go from here?
Bloomberg columnist John Authers analyzes a stronger dollar thanks mainly to high yields on U.S. Treasuries, a surprisingly large fiscal policy and good news from the U.S. about the epidemic. Conversely if you look at growth expectations in Europe, the odds are that the euro will fall further.
Until recently, the euro has been tracking the eurozone’s deficit relative to the U.S., which makes it look very overbought.
Juckes believes that there is a lot of optimism embedded in the euro’s current relative strength, of which China deserves a lot of credit. Most of Europe’s manufacturing exporters export to China, and they are benefiting from China’s recovery.
The U.S. ISM’s PMI index shows a sharp rebound in U.S. manufacturing, but the EU, and Germany in particular, is doing even better.
Thus, European manufacturing is doing better than many thought, but the Biden administration’s ambition to increase spending, which I fear is highly unlikely in Europe, complicates matters. Therefore, for to bet on the euro also have to pay attention to the United States and China.
The euro’s salvation – vaccination
The bullish euro also has to hope for a successful vaccine rollout and assume that the region will be able to quell the outbreak by the end of the year. If vaccination efforts improve, then the euro may find some reserve strength.
Is this assumption reliable? Unfortunately, so far, vaccination progress in continental European countries is still far behind.
Low vaccination rates, combined with a third wave of the epidemic, are constraining economic mobility on the continent; meanwhile, economic activity in the United States is picking up rapidly, almost returning to normal pre-pandemic levels.
Mathieu Savary believes that Europe has reached a low point. Doubts about the safety of AstraZeneca vaccines have hampered the implementation of European vaccination programs, and many vaccines produced in Europe have been exported elsewhere.
But these issues should be resolved soon. It is estimated that by the end of the quarter, vaccine supplies in continental Europe will be more plentiful and reliance on AstraZeneca will be greatly reduced.
If Europe can overcome the epidemic, the weakness will soon disappear. But all in all, unfortunately, the process will be difficult.
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