A great rise in early 2023 has burned out in the face of sluggish worldwide economic performance along with the AI hype which has lit up Wall Street, suggesting that European shares and the euro will fall short of US markets over the months to come.
The S&P 500 is in a technical bull market because it has gained over 20% from the October low and up14% so far this year. It surpassed Europe's STOXX 600, which is up 9%, for the first time this year in late May.
The currency has also been somewhat of a burden. The STOXX 600, which has increased 11.3% in 2023 while the euro has increased 1.1%, is still trailing. It gained over 14% year to date when measured in dollars in the middle of April, while the euro had up 3.6% versus the dollar.
Bernie Ahkong, the co-chief investment officer at fund management UBS O'Connor Global Multi-strategy Alpha, stated that European equities are appearing less fascinating and appealing in comparison to the United States.
Ahkong also cited the excitement surrounding artificial intelligence as favoring the US, as well as a disparity in the areas' monetary policies, with more rate rises and a longer route to any rate decreases anticipated in Europe.
Several other fund directors are also turning their backs on Europe.
The June fund manager research by Bank of America, which surveyed 285 managers having $764 billion in funds under management, revealed that investor allocations to US equities increased by 14 percentage points in June while it decreased by 11 percentage points for euro zone shares.
Although investor positioning reached highest level since December 2021, there was little change in investor allocation to technology companies in June, which was net 16% overweight.
The US S&P 500 index will beat its European counterparts when technology sector performs much better, according to Geoffroy Goenen, the head of fundamental European equity management from fund manager Candriam.
In the current S&P 500, the core sector accounts for nearly 50% if you include biotech and social media, compared to barely 10% in Europe.
In 2023, the S&P 500's equal-weighted version, which lessens the effect of large-cap tech stocks, is up slightly under 4%.
Turnaround
Low expectations contributed to the the positive performance of the European market earlier. The largest discount between European and American peers was seen in September of last year. The difference between the two valuations, however, narrowed in January as a result of a decrease in natural gas prices, which mostly allayed worries about the European economy's future.
Optimism was also bolstered by the belief that the economic reopening of China will have a significant positive impact on Europe. Gains were actually mostly limited to German travel, industrials and leisure, and major luxury brands, and even those companies experienced a decline to seven-week lows in late May.
Graham Secker, a chief European equity strategist from Morgan Stanley, said that they were in a sweet spot with European stocks through the final quarter of last year and the initial quarter of this year.
He also cited the strong performance of tech equities and the rolling over of European macro data as signs that this has begun to change in the past one or two months as sentiment toward China has once again weakened.
According to figures released last week by the European statistics office Eurostat, the euro region's economy experienced a technical downturn in the first quarter.
Hani Redha, the global multi-asset portfolio manager from PineBridge, declared that to them, both Europe and the United States look ugly. But because the temporarily positive data from Europe is actually likely to change, it appears even worse than the United States.
The euro region's data has been below expectations for weeks in contrast to the United States, where data has outperformed expectations.
This also appears evident in the currency markets, where despite a rebound this week, the euro has lost 1.8% of its value since its peak in early May. This, according to Barclays analysts, is the result of the hard macro environment of weakening growth in China and Europe, and strong data in the US.
According to them, the euro is likely to face challenges in the coming weeks while waiting for a more favorable worldwide growth trigger, perhaps in the way of Chinese stimulus.