European assets are now gaining popularity as US markets struggle.

European Assets Have Been Outperforming Their US Counterparts In Recent Years, Leaving Wall Street Behind.

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Since the end of September, equity markets in the Euro area have seen significant growth, rising 38% in US dollar terms. This is the best start to a new year that the region has ever seen. Additionally, investment-grade credit in the Euro area is ahead of its US counterparts by 6 percentage points, and the euro has gained 10% in value against the US dollar.

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There are several key factors driving Europe's recent revival. These include the mild winter weather, which has eased investor concerns about the region's energy crisis, and the sudden reopening of the Chinese market, which is crucial for many European industries. This may just be the beginning, as European stocks remain cheaper than their 20-year average despite the recent rally, and top strategists from Citigroup Inc. and Goldman Sachs Group Inc. are upgrading their view on the region.

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"Looking ahead to 2022, we expect a major shift in the global economy, from ultra-low interest rates to a world where there is a cost of capital and valuation matters," said Grace Peters, JPMorgan Private Bank's head of investment strategy. "Within this broader context, Europe looks attractively valued, at a 30% discount to the S&P 500. So despite the recent outperformance, we believe this trend will continue."

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Analysts at JPMorgan Chase and Deutsche Bank believe that corporate bonds will rebound in the coming year after underperforming in 2014. They also believe that the euro's recent rally is just the beginning. Even though data this week showed that US inflation cooled in December, European stocks still outperformed on the day. This raises hopes that the Federal Reserve will slow its pace of interest-rate hikes.

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Although Europe has had some periods of outperformance against the US, history suggests that this is not a sustainable trend. According to data compiled by Bloomberg, the last time Europe significantly outpaced the US was from 2005 to 2007. Since then, there have been several attempts by Europe to regain the lead, but none have been successful in the long term.

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There are risks now from the war in Ukraine and the threat of a cold snap that could reignite the energy crisis. Because the European Central Bank was slower than others to start rate increases, its tightening has some ways to go.

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Investors are expected to prefer Chinese and European equities over other markets in 2023, as these regions are expected to offer greater growth potential. Economic conditions in the US are expected to remain relatively stable, while growth in China and Europe is expected to outpace that of other developed economies. This preference for Chinese and European stocks is expected to continue into 2024 and beyond. The new confidence among businesses coincides with surveys showing resilience in business activity.

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In Germany, the economy is expected to stagnate in the final quarter of 2022, despite expectations for a contraction. Similarly, UK output is also looking stronger than anticipated. As a result, economists at Goldman Sachs no longer predict a euro-zone recession this year.
In addition to all of that, European stocks are attractively priced. The Stoxx Europe 600 Index trades at about 12.7 times forward earnings, compared to 17 times for the S&P 500, according to data from Bloomberg.

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European valuations are far better than their US counterparts, according to analysts and investors. Even in corporate credit, European valuations are far superior to those in the US. This is due in part to the fact that the European benchmark is cheaper than its 20-year average, while the US benchmark trades above that level.
According to Charlotte Ryland, co-head of investments at CCLA Investment Management, markets outside the US appear to offer considerably better value when looked at from an index perspective.

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One reason for Europe's lower exposure to growth-linked technology stocks is that these stocks were hammered last year as rising rates hurt expensive sectors by increasing the discount for the present value of future profits.

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The future of the sector looks bleak as it tries to reduce costs in the face of weaker demand after the post-Covid boom.
On the other hand, Europe is more heavily weighted toward sectors that would benefit from higher interest rates, such as financials. Goldman Sachs strategists said they expect such cheaper, so-called value stocks to outperform again in 2023.

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The trend of luxury stocks outperforming US tech stocks is already visible in the share prices of companies like LVMH. The luxury sector has remained resilient to global economic slumps in the past, and it looks like that trend will continue in the coming year. Markets with exposure to China are outperforming those without. Germany’s benchmark DAX index is up 8% already this year, more than twice as much as the S&P 500. This is likely due to China’s strong economic growth prospects.

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Wouter Sturkenboom, chief investment strategist for EMEA & APAC at Northern Trust Asset Management, believes that European markets will continue to outperform US stocks in the coming year. He cites value as the primary factor driving this trend, noting that European stocks offer more value than their US counterparts at present.
According to JPMorgan strategists, the balance of global risks is starting to shift away from Europe. Led by Matthew Bailey, the team argues that this shift could have implications for the credit world.

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Analysts expect the premium on European bonds to drop to zero following Russia's invasion of Ukraine. The gap between European and US high-grade spreads has already shrunk by almost half since peaking in October.

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In the high-yield world, UBS AG analysts see a US default rate of 6.5%, which is about three percentage points higher than the default rate in Europe.
However, there are also cautious voices here. HSBC Holdings Plc strategists have tempered their optimism around euro-area credit, saying ECB hikes are still feeding through to the economy, and industries have not yet shown how they can adapt to an era of higher energy costs.

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Ipek Ozkardeskaya, senior analyst at Swissquote, believes that a number of factors, including a stronger euro, will continue to support Europe's outperformance against the US. However, she notes that neither region is entirely out of the woods yet, and another significant selloff could occur in both markets.