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Forgive my indulgence of movies from my childhood in that headline, but as advisors well know, European stocks have been lampooned for some time now.
For the three years ending June 7, the S&P 350 Europe Index is up 29.2%, a paltry showing relative the 62.3% returned by the S&P 500 over the same period, particularly when considering the annualized volatility on two benchmarks is nearly identical during those three years. From 2015 through last year, there was just one occasion – 2017 – in which the European benchmark topped its U.S. counterpart on an annual basis.
It's hard to get over laggard status like that. Yes, there plenty of benefits to international diversification, but not at the levels recently offered by European equities. Making matters worse for asset allocators is the fact that European stocks have long tempted on valuation only to crush those dreams with sub-par performance.
Indeed, it's hard to believe this time will be different, but there are signs emerging maybe it will be. Year-to-date, the S&P 350 Europe Index is up 16.1% – an advantage of 280 basis points over the S&P 500 – and some market observers see more on the way.
Europe Working Through Headwinds
While the U.S. was quick to send cash to citizens and swift in overcoming logistical issues surrounding coronavirus vaccine roll outs, the opposite is true of Europe. That's the bad news, but the goods news is even against that challenging backdrop, European equities are performing well.
“Slow vaccine rollout and reinstated lockdown measures amid the resurgence of the pandemic earlier this year took a toll on euro-area recovery, pushing the region into a double-dip recession in the first quarter,” according to State Street research. “However, as the EU countries overcome logistical hurdles and boost vaccine supplies, the surge in new cases has begun receding and mobility restrictions have been eased.”
Europe's sluggishness in stimulus and vaccine disbursements is an obvious hurdle, but it's one being conquered and one that implies stocks there could have more room to run because the impact of these catalysts isn't as baked into European equities as it is with domestic stocks.
“Given the initial delay in recovery, there is more room for improvement in the coming months and potentially more upside surprises,” adds State Street. “In fact, an EU economic sentiment survey recently found that economic activity has started to shift into a higher gear.”
Catalysts Beyond Covid Response
As has been seen here in the U.S. since March 2020, how government responds to the health crises has direct impact on asset prices. That should prove to be the case in Europe and the aforementioned performance of the S&P 350 Europe Index proves that scenario is already taking shape.
However, there's more to the story and it's positive for advisors mulling Europe exposure for the first time in what's likely years.
European equities lagged for years because the composition of many benchmarks addressing stocks there is heavily cyclical with significant value tilts – concepts that are clearly working in the U.S. this year.
In addition to the cyclical value leanings of many European stocks, the asset class has a couple of other points in its favor. It really is a value group, trading at just 20% of the S&P 500's forward earnings multiple and European equities often perform well when interest rates rise. Indeed, maybe this time will be different for stocks across the pond.
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