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For money executives nervous about US equities at very highs during an economic crisis and election year, Europe could be the antidote.
Investors of BlackRock Inc. to Manulife Investment Management say the region’s coordinated and rapid response to the pandemic is also a good reason to be confident, despite the fact that European equities have been stagnant since early June.
The bullish sentiment across Europe can for the most part be seen as a shake for alternatives to the US, where stock appreciation is tight and tensions in China are running high. The November election also raises sentiment as President Donald Trump fights the Postal Service and steps up false allegations of widespread election fraud.
“If you compare the upcoming risks to events, Europe is a relatively calm economy compared to the US, UK and China,” said Peter Chatwell, head of multi-assetstrategy by Mizuho International Plc.
A recent Bank of America Corp. survey of fund managers found that Europe is now the most favored region and investors love the largest overweight in euro area equities since 2018. The Vanguard FTSE Europe ETF raised nearly $ 500 million in August, putting it on course for the best month since January.
BlackRock Inc. raised its view on European equities to overweight in June, and cut allocations to the US
“We’ve seen a big rally in U.S. big caps, so we’re generally looking for a way to diversify,” said Kiran Ganesh, an executive director at UBS Global Wealth Management. “There are pockets of Europe that are good.”
All that optimism has not yet manifested itself in prices. Shares in Asia and the US have been close to records, but the Europe Stoxx 600 index is still about 15% away from pre-pandemic highs.
Even though there is a lot of enthusiasm for Europe, it does not necessarily mean that investors are right. Predictions for a catch-up rally have failed miserably over the years, and an uptick in virus cases and travel restrictions threatens an already fragile economic recovery.
However, investors say the market is cheap and data show that European equities are ready for a faster profit record. According to Bloomberg estimates, earnings growth among Stoxx 600 companies will be 36% in 2021, compared to 24% for the S&P 500.
Some strategists also cite the euro as a possible bullish catalyst, saying the rally could slow the level and reduce the pressure on export earnings. Rabobank says it will be difficult for the currency to break $ 1.20 given the risk of further lockdowns in Europe and slow economic data. The bank expects the euro to rise to $ 1.16 this year, down from $ 1.18, according to Jane Foley, head of FX strategy.
“There is a perception that Europe as a whole has done a better job of managing the Covid crisis, and sentiment that US asset prices have been postponed is leading up to an uncertain election cycle, ”said Nathan Thooft, Manulife Investment Management’s head of global asset allocation.
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