European markets are getting difficult to ignore

The Star

12 hours ago

Gaining ground: A view outside the London Stock Exchange. Investors are slowing their purchases of US assets and shifting more money to Europe amid concerns that Trump's programme of tariffs and tax cuts will impact earnings and stoke inflation. — AFP
LONDON: European stocks outperformed their US peers by the biggest margin on record in dollar terms during the first half, the most dramatic sign of how the region's markets are staging a comeback after more than a decade in the doldrums.
The rebound isn't confined to stocks: the euro is up 13% against the dollar in the six months through June. Meanwhile, the chaotic rollout of US tariffs wiped some of the shine off Treasuries.
German bunds have outperformed them since April even as the government braces to issue more debt. Assets in emerging European markets like Poland and Hungary are also rallying sharply.
Investors globally are slowing their purchases of US assets and shifting more money to Europe amid concern that President Donald Trump's programme of tariffs and tax cuts will impact earnings, stoke inflation and widen the budget deficit.
Europe has become the big beneficiary as governments there boost spending while its central bank slashes interest rates.
'We're seeing extremely strong demand for European assets, particularly from the United States,' said Erik Koenig, who runs the EMEA equity sales desk at Bank of America Corp in London.
'While Europe has faced challenges in the past that may have held its markets back, there's now a growing confidence in its long-term potential.'
For Koenig, the shifts in the United States have prompted Europe to take steps that have suddenly – and sustainably – improved its outlook.
The region has had false dawns before, and the political instability and cumbersome regulations that deterred investors for years haven't fully gone away – valuations in Europe remain depressed relative to the United States.
But something profound has happened, particularly after Germany removed its debt brake. Europe's biggest economy is now committed to borrow more and invest massively in defence and infrastructure after more than a decade of austerity, igniting a new sense of optimism.
'It's an exciting time to be in European markets,' Koenig said.
At the European Central Bank, officials have been cutting rates aggressively, in contrast to the measured approach from the Federal Reserve. The rate differential will remain at or close to two percentage this year, based on swap market pricing.
The wave of government spending, which will be funded through fresh debt sales, is expected to deliver a much-needed growth boost to the euro area.
For Allianz Global Investors, one of Europe's largest asset managers, this has been a clear signal to slow its buying spree in US assets, and return to stocks and bonds at home.
'We don't feel comfortable in Treasuries anymore. We are going to the bund market,' said Greg Hirt, chief investment officer of multi-asset strategies at the firm.
'There will be more issuance in bunds because of German fiscal policy, but that is good because it makes it a more liquid market.'
At the same time, the euro stands to benefit from the economic growth boost after underperforming for the past decade.
The currency was headed for its longest stretch of monthly gains in eight years, and JPMorgan Chase & Co is among firms that see it reaching US$1.20 this year, up from US$1.04 at the end of 2024.
Mark Nash at Jupiter Asset Management is even more bullish on regional growth.
'It wouldn't surprise me if we hit US$1.30 within around six to eight months,' he said, adding that he sees the common currency surging to US$1.40 next year, a near 20% jump from current levels.
Meanwhile, low rates and stimulus measures will support corporate earnings, with both the United States and Europe estimated to provide 10% to 11% profit growth next year.
European stocks trade at a 35% discount to their US peers, making for attractive valuations. — Bloomberg