European Stocks Poised for a Comeback
As global investors reassess their portfolios, beaten-down European stocks are gaining traction, driven by concerns about the potential impact of US economic shocks under the new administration. The appeal of international markets is growing, and Europe is emerging as a prime beneficiary.
A Shift in Sentiment
Amundi, Europe’s largest investor, has turned bullish on Europe, citing exaggerated trade war fears and undervalued stocks. This sentiment is echoed by other major banks, which are predicting a turnaround in the European market this year. Lipper data shows that funds investing in European equities have just recorded their first weekly net inflow since October, indicating a growing interest in the region.
Risk-Reward Profile Improves
Barclays notes that the European market’s risk-reward profile is improving, driven by emerging anxiety around US policy uncertainty. Deutsche Bank and Citi are forecasting double-digit returns for the STOXX 600 index this year, while Goldman Sachs believes that lowly-valued companies are likely takeover targets.
A Diversification Opportunity
As investors become increasingly concerned about US inflation and interest rate hikes, they are seeking diversification opportunities. Baird strategist Ross Mayfield argues that policy shocks will weaken the dollar and boost US investors’ interest in euro-denominated assets. This could lead to a resurgence in European stocks, which ended 2024 at a record discount to the S&P 500.
Attractive Valuations
Cheaply-valued European banks and aerospace and defence stocks are now seen as attractive opportunities by investors. Raymond James Investment Management chief market strategist Matt Orton notes that these sectors offer a diversification benefit and are poised for growth.
Euro Zone Economy Stabilizes
While the euro zone economy remains weak, the long-term decline in business activity has eased following four European Central Bank rate cuts last year. Edmond de Rothschild Asset Management portfolio manager Marie de Leyssac believes that the trough in the euro zone has been reached, paving the way for a rebound in 2025.
A Rebound in Sight
As European economic data improves, investors are likely to become more positive about the region’s prospects. Janus Henderson multi-asset fund manager Oliver Blackbourn is cautious but notes that he would quickly turn positive if European economic data continues to improve. With valuations at historic lows, European stocks are poised for a comeback.
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