It’s buyer beware for investors who are shedding U.S. stocks in favor of their European rivals in hopes that the Continent will sweep the year.
That’s according to strategists at Deutsche Bank who laid out three conditions which they say must be met for Europe to outperform — none of which looks to happen soon.
First up, Europe’s economic growth must outpace that of the U.S. this year, wrote a team of Deutsche Bank strategists led by Sebastian Raedler in a note to clients Thursday. That’s based on their finding that relative performance of Europe versus U.S. equities has closely tracked relative gross domestic product growth for the last 20 years. The bank’s economists are predicting U.S. GDP of 2.6% this year versus 1.3% for Europe.
As for that second condition, the bank’s strategists point out that European equities have underperformed their U.S. counterparts by 40% since 2007 owing to inferior earnings per share growth. That pattern shows no sign of changing this year, as the DB team expects EPS growth of 13% in the U.S. versus 9% for the Continent.
Finally, Raedler and his team explain that European equities normally outperform the U.S. when the global composite purchasing managers index for new orders — a key indicator of the economic health of manufacturing — rises above 55. That reading currently stands at 53.6 and DB economists’ 2017 global GDP forecast implies a PMI of 53.
Hence, European stocks look to underperform their U.S. rivals this year by about 5% (annually), projected the strategists.
For now, Deutsche Bank is sticking with its Stoxx 600 year-end target of 375, which is about 1% below current levels. “Signs of a fade in the global growth momentum rebound leaves us waiting for a better entry point,” said the strategists.
On a year-to-date basis, the Stoxx Europe 600 Index
is running neck and neck with the S&P 500 index
with each up 4.4%. Fears of a delay in U.S. tax reform by the Trump administration have been holding back further gains for Wall Street after a post-election rally late in 2016.
But investors have shown increasing appetite for European stocks, confirmed by a survey of fund managers by Bank of America Merrill Lynch on Wednesday. It showed allocations for U.S. stocks fell to their lowest levels in just over 10 years, as investors piled into Europe.
According to that survey, investor interest in Europe has been rising as fears that the European Union will far apart have faded, even though a crucial election is looming in France.The rotation last month to eurozone stocks from U.S. equities was the fifth largest since 1999.
Ahead of this Sunday’s first-round presidential election in France, polls so far are showing a tight race between the four main candidates. Concern is percolating that stocks will fall next week if far-right, anti-EU candidate Marine Le Pen comes out ahead. An ultimate victory by Le Pen has UBS predicting as much as a 35% slide for the Eurostoxx