Europe has increased the stimulus, with countries like France launching larger-than-expected packages to boost the economy.
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While the state of the Covid-19 pandemic in the US and China has been largely focused, Europe has quietly progressed. Policy makers have come together and worked quickly to cushion the consequences, and that means European actions could be ready for a return.
There is no doubt that they have not been loved for a while. In the past six months, the Stoxx Europe 600 Index has fallen nearly 12%, compared with a 2.6% decline in the S&P 500. And it has lagged a lot in the past three years, increasing just 4.8%, compared to 36% for the United States Index.
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The coronavirus may have changed the equation. In its midyear report, the BlackRock Investment Institute said the Covid-19 restart will look different across the world because public policy and public health measures have varied. And while the United States appears to be struggling to keep the virus contained, Europe stands out for the progress that has been made.
For example, as American cases continue to rise and reopening plans shrink, daily cases decrease in most major European cities. Cafes have reopened in Paris, stores are open in Germany, and strict blockades in Spain, for example, have eased.
That is not the only reason to have a more favorable inclination towards Europe. If the United States begins to cut policy support too soon, it could be a problem, according to Mike Pyle, chief global investment strategist at the BlackRock Investment Institute. It is also concerned about the deterioration of relations between the United States and China and the possibility of a tumultuous election season.
In contrast, Europe has increased the stimulus, with countries like France launching larger-than-expected packages to boost the economy. A recovery plan of 750 billion euros ($ 845 billion) is also being considered for the region, which proposes to increase spending now without overburdening countries with new debt. As a result, the BlackRock team has an overweight in European equities and an underweight in emerging markets, and recently moved to a more cautious neutral position on US equities due to risks over the next six months.
Not everyone is so excited about Europe. The EU Summit, scheduled for July 17-18, will be the next test of whether its policy makers are truly committed to change. BofA Securities strategist Athanasios Vamvakidis worries that the market is becoming overly optimistic about a deal. “Although the European authorities have a great capacity to oversell such decisions, we see risks that the details and actual implementation may disappoint,” he writes.
Still, a more aligned Europe has the potential to change the way investors view the continent, says Morgan Stanley strategist Graham Secker. Europe has been plagued by the inability of its political leaders to work together to support its weakest members and persistent concerns that the European Union will eventually break. If its leaders follow its plan to support Europe’s economic recovery for years to come, investors may see it more favorably.
Nick Andrews and Cedric Gemehl of Gavekal Research gave a similar tone in a recent note, in which they write that a new European dawn could be on the horizon that could finally increase the return on invested capital in the euro zone, boosting the euro and focused nationwide stocks. The duo writes that Germany has switched from “enforcer of fiscal rules” to “protector of the euro zone”, with its own € 130 billion stimulus plan and support for the region’s recovery plan, all as it might face. more difficult trade relations with the US, UK and China.
Recent data has shown glimpses of a recovery. Truck mileage and restaurant reservations outside Germany suggest that economic activity is roughly returning to pre-crisis levels and that a strong rebound is taking place. Data from the June Flash Buying Manager Index, an indicator of activity in the services and manufacturing sector in the region, were stronger than expected.
For those who think that a global recovery is taking place, albeit uneven, Europe also offers more cyclical stocks that are likely to benefit, and eurozone stocks are more undervalued than US stocks than at any other time. in the last two decades. In a note to clients, Mark Haefele, chief investment officer at UBS Global Wealth Management, said he preferred German and European industrialists as a way to benefit from that recovery.
A quicker way to gain wider access to euro zone stocks is through the iShares MSCI Eurozone (ticker: EZU) exchange-traded fund. The ETF has fallen 12% so far this year, but has gained 25% in the past three months. If you are looking to gamble in Europe, this is not a bad place to start.
Write to Reshma Kapadia at [email protected]
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