As Wall Street ponders the longevity of the value trade after a miserable few weeks of performance in the U.S., outside of the country it could be just getting started.
For all the dominance of megacap growth names, American stocks led the world during the cyclical upswing in the first half of the year — and that means other regions are now primed for a catch-up.
Take Europe. With a far more economically sensitive equity market, a vaccine roll-out finally closing the gap to the U.S. and business activity gathering speed, firms from Lombard Odier to BlackRock Inc. are recommending investors boost their exposure to the region.
The post-virus chaos growth relay has shifted from China to the US and to the Euro zone.
At the same time, a US index of value shares outpaced a rest-of-world gauge by more than 6%, according to MSCI Inc. indexes.
- S&P 500 +16.3% YTD
- Russell 2000 +15.5% YTD
- NAS Comp +14.1% YTD
- DJIA+13.9% YTD
It all means European shares look cheap. Members of the Stoxx 600 trade at less than 17X expected earnings Vs 2!X for stocks in the S&P 500.
In the UK it’s even more dramatic; FTSE 100 Index companies trade at an average of 13X the coming year’s earnings.
“Euro zone and U.K. equities still trade at relatively cheap multiples, despite their exposures to both the global recovery and the reflation themes,” the chief investment officer at Lombard Odier, wrote in a note. “These are where we see the greatest likely benefits from economic re-openings, an acceleration in relative earnings momentum as well as attractive valuations.”
And while European equity funds drew $16-B last Quarter, the strongest flows in 4yr they stand to gain even more given $230-B of outflows over the last 3yrs.
It helps that the region’s economic growth is also likely to accelerate: European Union officials markedly raised their outlook for the Euro-area economy last wk.
“We see a sizeable pickup in activity helped by accelerating vaccinations,” BlackRock Investment Institute strategists wrote in their mid-year outlook this week, as they shifted to overweight on European shares and to neutral on US equities. “Valuations remain attractive relative to history and investor inflows into the region are only just starting to pick up.”
The Bull case depends on a conviction that economic momentum is only poised to accelerate.
Treasury yields sunk to a four-month low last wk, and a long-short value strategy is down again in July after sliding the most since January 2020 last month. Giant growth shares like Amazon.com Inc. and Apple Inc, the kind Europe does not have.
Strong EPS momentum should provide further support for global equities in 2-H of Y 2021. The UK looks like a good value trade.
Have a prosperous week, Keep the Faith!