US stocks have underperformed global stocks by a wide margin over the past three months, which is rare in recent years, and analysts expect the gap to widen through 2023.
As of Tuesday morning (24th), the benchmark Russell 3000 index of US stocks has risen 6.3% in the three months since October 24, while the Standard & Poor’s 500 index has risen 4.62%.
By comparison, the MSCI World Index excluding US stocks rose more than 22 percent, while the pan-European Stoxx 600 gained more than 13 percent.
Weak US retail sales and industrial production data last week reinforced the view that the US economy is slowing, while growth prospects in Europe, Asia and various emerging markets have improved significantly.
In a research report on Friday (20th), Barclays’ European equity strategists emphasized that the direction of activity in Europe and the United States was decoupled from the index) and a rebound in ZEW economic sentiment.
Unseasonably warm weather in northern Europe and a faster-than-expected lifting of coronavirus restrictions in China have given relief to the European outlook, but many economists still expect a mild recession.
Meanwhile, the opposite is happening in the US, with data pointing to a more severe economic slowdown, but inflation also showing signs of a continued downward trend, leading to hopes that the aggressive rate hike cycle of the Fed has ended.
Barclays strategists said, “Over the past two months, stocks and bonds have hailed the first signs of deflation and slowing growth as they bolstered the idea that interest rates have peaked, but ‘the data is bad for stocks. The bullish narrative now appears to be over in the US.” “The stock market rally is losing steam while the bond rally is accelerating. It’s similar to how a classic recession will start, with investors selling stocks and buying bonds.”
In contrast, Europe appears to be in the “sweet spot” at the moment, with deflation hopes pushing yields lower and economic confidence boosted by lower energy prices and the reopening of China pushing stocks higher, he said. the bank.
Emmanuel Cau, head of European equity strategy at Barclays, said: “We were overweight Europe and the US at the start of the year, believing the former offered better value, likely to see reallocation of funds to the region and it could be argued that more aggressive growth. Risks, at least in the short term.” “However, if the macro situation in the US deteriorates further, history suggests that the decoupling of the two markets may not last long.”
Stephen Isaacs, chairman of the investment committee at Alvine Capital, said that fears that energy prices will remain high or could get out of control are at the heart of Europe’s recovery compared to the United States.
This is confirmed by recent portfolio flow data from BNP Paribas, which showed foreign funds returned to eurozone equities in October and November for the first time since February 2022 as gas prices fell.
Isaacs also pointed out that while the discussion of high interest rates usually focuses on the negative impact on economic growth, they also mean that savers generate income, “Broadly speaking, where do we find r the biggest savers? Things like Germany, northern Europe Places like that, so I think those are again small factors that people forget.”
“Tourism is once again a big advantage for Europe and finally the fact that European assets have been undervalued and underowned for some time,” he said.
Although the performance gap between Europe and the US has widened significantly in recent years, Isaacs said the US stock market favors large-cap growth and technology stocks compared to many European markets, which n include consumer staples, finance and other value. stocks, means that the tide is moving.
“I think in areas like financial services in Europe, European banks are still trading at a significant discount to book value, so there are some significant discounts, obvious value,” he said.
Although markets are increasingly leaning towards betting that the Fed will soon end its tightening cycle and may even start cutting interest rates before the end of the year in response to sluggish growth and falling inflation, the ECB is expected to remain hawkish as it awaits final policy. The interest rate is 3.5-4%.
