U.S. stocks have underperformed global stocks by a wide margin over the past three months, a rarity in recent years, and analysts expect the gap to widen through 2023.
As of Tuesday (24th) morning, the Russell 3000 benchmark index of US stocks has risen by 6.3% in the three months since October 24th, while the Standard & Poor’s 500 index has risen by 4.62%.
By comparison, the MSCI World Index excluding U.S. stocks surged more than 22 percent, while the pan-European Stoxx 600 gained more than 13 percent.
Weak U.S. retail sales and industrial production data last week reinforced the view that the U.S. economy is slowing, while growth prospects in Europe, Asia and various emerging markets have improved significantly.
In a research report on Friday (20th), Barclays European equity strategists emphasized that the direction of activity in Europe and the United States is decoupling. index) and a rebound in ZEW economic sentiment.
Unseasonably warm weather in northern Europe and a faster-than-expected lifting of coronavirus restrictions in China have given relief to the European outlook, but many economists still expect a mild recession.
Meanwhile, the opposite is playing out in the US, with data pointing to a more severe economic slowdown, but inflation also showing signs of a continuing downward trend, leading to hopes that the Fed’s aggressive rate-hiking cycle is over.
Barclays strategists said, “In the past two months, both stocks and bonds have cheered the first signs of deflation and slowing growth as they strengthened the idea that interest rates have peaked, but ‘the data is bad for stocks. The bullish narrative now appears to be over in the U.S.” “The stock market rally is losing steam while the bond rally is picking up speed. It’s similar to how a classic recession will start, with investors selling stocks and buying bonds.”
By contrast, Europe appears to be in the “sweet spot” right now, with deflation hopes pushing yields lower and economic confidence buoyed by lower energy prices and the reopening of China pushing stocks higher, the bank said.
Emmanuel Cau, head of European equity strategy at Barclays, said: “We were overweight Europe and the U.S. at the start of the year, believing the former offered better value, likely to see reallocation of funds to the region and arguably more aggressive growth. Risks, at least in the short term.” “However, if the macro situation in the U.S. deteriorates further, history suggests that the decoupling of the two markets may not last for long.”
Stephen Isaacs, chairman of the investment committee at Alvine Capital, said that at the heart of Europe’s recovery relative to the U.S. is fading fears that energy prices will remain high or could spiral out of control.
This is confirmed by recent portfolio flow data from BNP Paribas, which showed that foreign funds returned to euro zone equities in October and November for the first time since February 2022 as gas prices fell.
Isaacs also pointed out that while the discussion around high interest rates usually focuses on the negative impact on economic growth, they also mean that savers are generating income, “Broadly speaking, where do we find the most savers? Things like Germany, northern Europe Places like that, so I think those are again little factors that people forget.”
“Tourism is once again a big plus for Europe and finally the fact that European assets have been undervalued and underowned for some time,” he said.
While the performance gap between Europe and the United States has widened significantly in recent years, Isaacs said that the U.S. stock market’s preference for large-cap growth and technology stocks compared with many European markets, which are made up of consumer staples, financials and other value stocks, means the tide is moving. change.
“I think in areas like financial services in Europe, European banks are still trading at a significant discount to book value, so there are some significant discounts, obvious value,” he said.
While markets are increasingly leaning towards betting that the Fed will end its tightening cycle soon and may even start cutting interest rates before the end of the year in response to weak growth and falling inflation, the ECB is expected to remain hawkish as it expects terminal policy The interest rate is 3.5-4%.