Investors are hunting for bargains in unloved corners of Europe’s equities market as central banks’ plans to unwind their powerful stimulus programmes dull the allure of glitzier tech companies.
MSCI’s index of value stocks in Europe has jumped almost 5 per cent in the first three weeks of 2022 on a total return basis, far exceeding the nearly 5 per cent decline for the index provider’s broad World measure of developed market equities.
The gap in local-currency returns would mark the biggest monthly outperformance on record if it holds through the remainder of January, FactSet data to the close of trade on Thursday show.
Value stocks — companies that are priced inexpensively compared with fundamentals such as profits or book value — have lagged behind as racier, but more richly priced, technology shares have flourished. European value stocks have only outperformed the broader global market in two of the years following the global financial crisis in 2008.
However, surging global bond yields and expectations that central banks will need to rein in economic support measures launched early in the pandemic have prompted an abrupt shift in the dynamic.
Fast-growing but more speculative US tech shares have sustained particularly heavy selling this year, as investors bet that the Federal Reserve will lift interest rates several times from the historic lows at present. Higher interest rates are viewed as particularly painful for shares in fast-growing companies because they erode the current value of their projected future earnings.
Adding to the sense of uncertainty, Jeremy Grantham, co-founder of investment group GMO, on Thursday warned in an investor note that “[t]oday in the US we are in the fourth superbubble of the last hundred years”.
Investors in US stocks are “acknowledging that this higher-rate environment might not be the best for them”, said Liz Young, chief investment officer at SoFi. “Europe is a great option”.
Energy majors BP and Royal Dutch Shell and financial groups HSBC and Allianz are among the big European value stocks that have already posted significant gains in 2022. All four companies trade at less than 11 times expected earnings over the next year, a far cry from the multiples of 49 times or 100 times for Wall Street high-fliers Nvidia and Tesla, respectively.
In another sign of the shift in sentiment, funds holding European financial stocks have garnered $1.4bn in new client money so far this year, according to Bank of America.
The sector rallied last year, but many companies still trade at subdued earnings multiples as they have struggled through years of lacklustre economic growth and low interest rates.
Although economically sensitive stocks in the US are also attracting investors’ attention — the domestic KBW bank index, for example, has risen more than 6 per cent year-to-date — “a lot of investors are just overweight US large-cap and looking to diversify that out as well”, Young said.
That sentiment was echoed by analysts at UBS, who last week said that a “catch-up trade in lower-valued cyclical stocks” had encouraged it to advise clients to give European shares an “overweight” position in their portfolios relative to the US.
Others believe that investors’ pivot in January will prove to be shortlived. “Europe is holding up fairly well while markets fall in the US,” said Emmanuel Cau, strategist at Barclays, “but we don’t think it makes sense to diversify away from the US market given its strong earnings power.”