For over a decade, the US market and growth stocks have dominated most portfolios, with the magnificent 7 stocks giving outsized returns to investors. However, the US is currently facing a confluence of challenges and there has been broad weakness in US assets, as equities, bonds and the US dollar have weakened this year. Tariff-induced inflation, fiscal imbalances, and signs of labor market cooling are contributing to an environment of heightened uncertainty and instability.
With this backdrop, investors have started to look beyond the US, with Europe seeming like a preferred market for multiple reasons. The valuation of European equities remains undemanding, even after the run up this year. Governments are ramping up spending on infrastructure and defence, and this fiscal regime shift should benefit companies in construction and materials, real estate, telecom and utilities. Germany has taken a lead in fiscal stimulus by announcing a EUR 500 billion spend to bolster national security, infrastructure development and green transition. This could spread further across Europe. De-escalation of US-China trade tensions is a positive for Europe which has significant exposure to both US and China.
European banks have strengthened their capital bases due to robust earnings in recent years, and are well-positioned to navigate the recalibrating European economy. Likewise, European insurance companies maintain stable income streams and strong solvency ratios. This offers substantial buffer to mitigate potential impacts from geopolitical uncertainties.
The strengthening fundamentals of European regions demonstrated through Q1 company earnings beat (57% of the companies reported earnings beats, the fifth straight quarter of above long-term average proportion of beats) also support the investment case for European equities. While EPS revisions have faced pressure due to trade policy uncertainties and global macroeconomic concerns, the trend appears to stabilize as tensions ease.
The European Central Bank has cut interest rates 8 times in a year, acknowledging that inflation is in control and within reach of it’s 2% target. The Euro has strengthened over 10% against the dollar this year and is close to a 3-year high, signalling optimism toward the European economy.
In conclusion, renewed interest in European equities is being driven by both domestic and international capital flows, signalling growing confidence in the region’s prospects. Additionally, international investors are diversifying away from US assets due to factors like policy uncertainty and tariff risks, further boosting capital inflows into European markets.
The author, Nikhil Advani, is the Managing Director of International Business at LGT Wealth India.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.
