Banks accounted for nearly 16% of the STOXX 600 index and have benefited from the high-rate environment, gaining nearly 20% to hit their highest in almost five years. In contrast, 35% of the S&P 500 , the world's largest index by market value, are technology companies. Tech stocks on the index have gained just 9% this year as rising rates make future profits for tech companies less valuable.
Looking at the broader market, the STOXX 600 has added
nearly 7.5% in 2023, more than double the 3.4% gain in the S&P
500, marking its strongest performance versus the U.S. benchmark
since 2017, according to Refinitiv data.
"In a market that prefers value-style investments in a high
interest-rate environment, that clearly works in Europe's
favour," said Edward Stanford, head of European equity strategy
at HSBC.
The European equity market saw the least outflows among
major economies last week, of $100 million, while the U.S.
recorded the biggest outflows, of $9.1 billion, according to
Deutsche Bank.
"It's been a good few months for Europe relative to the
U.S., but there is more room for this trade to run over the
course of 2023," said Hugh Gimber, a global market strategist at
J.P. Morgan Asset Management.
"The attractiveness is not only at the index level but also
within sectors as well."
Even though Russia's year-old invasion of Ukraine sent the
cost of natural gas and electricity to record high and pushed
the region to the brink of a recession, Europe's economy is
looking a lot less fragile.
The winter has been warmer than usual and the region's gas
storage tanks are full. Along with billions of euros in
government aid to homes and businesses, the economy has shown
resilience.
THE CHINA BOOST Greater exposure to China at a time when the United States has been trying to reduce its dependence on the world's second largest economy has also helped Europe's automakers, miners and luxury companies.
Exports from the eurozone to China account for about 3% of the region's total GDP and 3.5% of Germany's output, according to Barclays. The Paris stock market, which houses premier luxury names including LVMH , Kering and Hermes International , has benefited more from China demand as its economy emerges from a strict pandemic-related lockdown.
"We are starting to turn more positive on consumer discretionary," said Laura Cooper, senior macro strategist at BlackRock. France's blue-chip index hit a record high earlier this month, while London's FTSE 100 recently notched a string of all-time highs.
"The resilience of the consumer is evident with the recent economic data, and largely in Europe over the U.S. because we're starting to see deterioration in some of the consumer gauges in the U.S.," Cooper said.
CHEAPER IN EUROPE On the valuation front too, the European stock market is much cheaper than the U.S. The STOXX 600 trades at about 13 times its 12-month forward price-to-earnings ratio, while the S&P 500 trades at some 18 times. "Europe remains cheap compared to their U.S. counterparts but this, at least at the index level, has a lot to do with sector composition," said Julien Lafargue, chief market strategist at Barclays Private Bank. Despite this advantage, it is yet to be seen if the outperformance by European markets will be sustained long term.
A Reuters poll found that analysts and strategists were cautious on European shares and expect the STOXX 600 to fall slightly in 2023 against the backdrop of a likely cut to earnings and doubts over the outlook for monetary policy.
"In addition, what drives long-term performance is not
valuations but earnings. And on that front, we see no reason to
believe that there has been a paradigm shift in favour of
Europe," Lafargue said.
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(Reporting by Shreyashi Sanyal in Bengaluru; Editing by Alden
Bentley, Amanda Cooper and Arun Koyyur)
