Risk appetite nonetheless remains high, as equity markets should – all other things being equal – continue to be driven by a soft landing in the US, along with interest rate cuts expected in the second half of the year. With this in mind, investors are trying to diversify their equity exposure by returning to markets that are more attractively priced, such as Europe. Bank of America’s latest “Fund Manager Survey”, for the month of March, found that enthusiasm for European equities was the highest it had been since June 2020. There are several reasons for this.

Attractive valuations

First thing’s first: European equities are trading at a historically wide valuation gap vs. the US, with the price/earnings ratio of the MSCI Europe ex-UK index currently 30% lower than the S&P 500’s. This is due among other things to the difference in sector breakdowns, as European indices are more value-oriented, with heavy weighting of sectors such as finance and energy and relatively few tech companies. However, fundamentally this valuation gap is not justified, as the two markets have similar financial leverage, debt and earnings ratios.

Generous yields

The dividend yield of the MSCI Europe ex-UK is now almost twice as high as the S&P 500’s.

Vincent Juvyns, global market strategist, J.P. Morgan Asset Management

Meanwhile, European equities are standing out more than ever in terms of dividend yield. In fact, the dividend yield of the MSCI Europe ex-UK is now almost twice as high as the S&P 500’s (3.15% vs 1.62%). True, this is nothing new, but the gap with the US continues to widen, especially as companies are now buying back more of their own shares than they used to. Share buybacks in Europe since 2022 are at a 20-year high and are no longer very far from US levels. If we add the dividend yield to the return generated by share buybacks, Europe’s total shareholder return is now 4.1%, vs. 3.4% for the US.

A relatively bright macroeconomic outlook

In 2024, economic growth is likely to remain weaker in Europe than in the US, as it was the past two years. This is due mainly to the fact that, while Europe was experiencing a major energy crisis, the US was consolidating its status as the world’s largest oil producer, with a 10% increase in daily petroleum output from 2022 to 2024. On the fiscal front, the gap between the US and Europe has also been wide, with the US’s ending 2023 with a deficit equivalent to 6.5% of GDP – almost twice as high as Europe. However, for the second half of 2024 and beyond, we can reasonably expect greater economic convergence between Europe and the US. While the US will inevitably have to reduce its deficit next year, Europe is likely to benefit for a few more years from the NextGenEU stimulus fund, with its lending and investment capacity of €723 billion. Consumption, particularly of services, is likely to remain relatively buoyant, with wages now rising faster in Europe than in the US and faster than consumer prices. Europe’s medium-term macroeconomic outlook is therefore not as poor might be suggested in current manufacturing activity or growth figures.

Investing in European equities doesn’t mean investing in the European economy, as companies derive more than 50% of their revenues from outside Europe.

Vincent Juvyns, global market strategist, J.P. Morgan Asset Management

Lastly, while Europe’s economic outlook is still open to debate, it is worth pointing out that investing in European equities doesn’t mean investing in the European economy, as companies derive more than 50% of their revenues from outside Europe.

For all these reasons, we recently raised Europe’s weighting in our asset allocation.

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Source: J.P. Morgan Asset Management April 24

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