European stocks have outperformed their US counterparts by 15 per cent since September. Can Europe continue to outperform?
The short-term outlook looks “trickier”, say Barclays strategists. They suggest the three factors driving European outperformance – energy prices retreating to levels before Russia’s invasion of Ukraine, China’s economic reopening and Europe’s banking system proving resilient to US banking woes – have “largely played out now”.
Add in renewed macro headwinds and Barclays sees little near-term European upside.
However, it is optimistic about Europe’s long-term picture, at least relative to the US. A few mega-cap technology giants are driving the US rally, with today’s narrow leadership looking “extreme”. In contrast, Europe’s stock market is more diversified and its leadership broader than the “highly concentrated” US market.
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Secondly, while positioning on European stocks is no longer depressed, nor is it stretched, with European funds’ cash allocations remaining well above historical norms.
[ European stock market rally looks very different to USOpens in new window ]
Thirdly, European valuations still look attractive. The US now accounts for roughly 60 per cent of the global stock market, compared to 40 per cent before the global financial crisis. Europe’s share almost halved over the same period. Europe, says Barclays, is “more than just a catch-up trade”.
