Published: April 19th, 2021
On Thursday, April 15, European stocks attained fresh record highs. Analysts are convinced a further upside still lies ahead because prices remain low compared to the U.S. The equities are expected to do even better in the coming months. Goldman Sachs predicts 40% earnings per share growth in the continent.
European stocks recorded fresh all-time highs on Thursday, April 15. Market analysts are confident the rally is set to continue because the prices are low compared to the U.S.
STOXX Europe 600, the continental index, climbed to 438.29, dashing past the levels last seen in February 2020 when the region’s stocks sold off just as the ravaging effects of the coronavirus pandemic started rearing their heads. The figures attained on Thursday indicate a more than 55% increase from the pandemic low recorded on March 18, 2020.
An analyst attached to BCA Research, a Montreal-based global investment research and strategy advice outfit, said that 2021 and 2022 would be kind to stocks in the Eurozone. In a note to investors, the analyst said the rally of Euro Area stocks stems from the expectation that the base lending rates will rise globally.
An increase in the central banks’ base lending rates will make some equities such as stocks more attractive than bonds. The increasing interest rates will also shift attention to beaten-down sectors, the analyst said.
Besides, European stocks are considerably cheaper, which increases their appeal, especially among investors considering the overall yield, the note said.
J.P. Morgan analysts echo their BCA Research counterpart. In a communiqué to their customers, the bank’s analysts said they project Europe’s STOXX 600 to grow by at least 3% in 2012. Many other analysts in the industry express high hopes. In March, Bank of America analysts predicted that the index would jump by a whopping 7% by the end of Q3 of 2021.
The sharp acceleration of the Eurozone’s GDP would benefit the European stocks immensely. However, the increasing GDP is a result of many factors. The boost from reopening of the bloc’s economies, in particular, is a crucial factor. The support lent by a recovering U.S. economy shattering all projections also plays a significant part in the bloc’s robust GDP.
According to Bank of America analysts, the projected dispersal of the New Generation EU (NGEU), a one-time EU recovery fund worth €750 billion (Approx. $900 billion), might have played a part. However, the analysts concur that the function of the funds in steering the Eurozone’s GDP when they are eventually dispersed is nowhere close to the two factors highlighted above.
The EU agreed in 2020 to gather resources from the public, a project it dubbed the NGEU. However, the money is still held by the commission and might not be disbursed until the summer months.
While almost everyone is giving the EU GDP and its equities market a thumbs up, a senior executive of a London-based wealth management firm is not as enthusiastic. Roger Jones, who heads the equities department at London and Capital, is not bullish about the EU stocks.
He said that although the pan-European index has exhibited a price recovery, it is still a long way to go before it gets to the earnings recovery phase. He added that earnings recovery might not come until 2022. The projected returns for next year are above 2019 levels, and it is only fair to predict that earnings recovery would kick in around the same time, Jones said.
He said that the index price recovery level might come under pressure in the unlikely event that the earnings do not meet the projections.
Overall, market analysts have given European stocks a cleaner bill of health compared to their U.S. counterparts. According to the interviewed analysts, European stocks will keep outstripping American equities for the next several months.
Experts at Goldman Sachs foresee a 40% earnings-per-share growth for these stocks. The analysts said that the corporates are benefitting from a recovering economy. Besides, they also hope that when the region rolls out its long-awaited fiscal plan and ramps up its vaccination campaign, then the stocks will perform even better.
The Goldman Sachs analysts led by Sharon Bell said that the Euro area would rebound sharply into the summer. They added that Europe is at a sharp discount compared to the U.S. market. The predictions come even against overall better performance from the U.S. stocks. The U.S. equities dashed past their February 2020 levels in November, five months before their European counterparts did. Besides, they have kept edging higher since then.
The broad upwardly move of stocks was rejuvenated by Joe Biden winning the White House.
The positive sentiment got a further boost from the new president’s $1.9 trillion fiscal stimulus proposal that has since been signed into law. Because of the progress, the S&P 500 index is currently 20% above pre-November levels.
While prospects remain great, analysts unanimously agree that the bloc’s Achilles heel is the vaccine rollout, which has lagged in various countries. The delay, coupled with the third wave of new coronavirus infections, renewed lockdown measures in several countries.
The Chief European economist at Berenberg Bank, Holger Schmieding, said that while the U.S. market is getting all the boost it needs from the fiscal stimulus, the EU market is affected by the stagnating vaccination process.
The slow progress of the vaccination process notwithstanding, the International Monetary Fund (IMF) said on Wednesday, April 7, that the European economies are likely to get to their pre-pandemic levels in 2022. The fund projects the bloc’s GDP to attain a growth rate of 3.9% in 2022. However, such success is heavily dependent on a successful vaccine rollout, the fund added.
Alfred Kammer, who heads the fund’s European department, said no one is sure how quickly the bloc can subdue the third wave. The European Commission targets to vaccinate 70% of its adult population by summer.