# Europe’s brief window of market outperformance swings shut
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-06-16
Category: Uncategorized
Category URL: https://financedigest.com/category/uncategorized
Meta Title: Europe's Outperformance Window Closes
Meta Description: Europe's equities and currency lag behind US markets due to tepid global economic performance, AI hype, and monetary policy divergence.
URL: https://financedigest.com/europes-brief-window-of-market-outperformance-swings-shuthtml

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# Europe’s brief window of market outperformance swings shut

By Samuel Indyk, Lucy Raitano and Alun John

LONDON (Reuters) – European equities and the euro look set to lose out to U.S. markets in the months ahead, as a stellar run in early 2023 has fizzled out in the face of tepid global economic performance and the AI hype that has brought a sparkle to [Wall Street](https://www.financedigest.com/investors-eye-lower-wall-street-on-powell-nerves.html "Investors eye lower Wall Street on Powell nerves").

The S&P 500 is up 14% [year to date and more than 20% from its October low](https://www.financedigest.com/putin-speech-sends-sterling-to-fresh-37-year-low-ahead-of-fed-boe-meetings.html "Putin speech sends sterling to fresh 37-year low ahead of Fed, BoE meetings") – putting it in a technical bull market. It overtook [Europe’s STOXX](https://www.financedigest.com/telecom-italia-tops-europes-stoxx-600-amid-spiking-covid-19-cases.html "Telecom Italia tops Europe’s STOXX 600 amid spiking COVID-19 cases") 600, which is up 9%, in late May for the first time this year.

The currency has acted as a bit of a drag too. In dollar terms, the STOXX 600 is still lagging, having gained 11.3% in 2023, while the euro is up 1.1%. In mid-April, the euro had [gained](https://www.financedigest.com/evergrande-jitters-pull-risk-currencies-lower-dollar-gains-on-safety-bid.html "Evergrande jitters pull risk currencies lower, dollar gains on safety bid") 3.6% against the dollar and the STOXX 600 was up more than 14% year-to-date when priced in dollars.

“Relative to the U.S., European equities are looking less interesting and attractive,” said Bernie Ahkong, co-chief investment officer at [fund manager](https://www.financedigest.com/advertising-technology-start-up-secures-funding-from-mercia-fund-management.html "Advertising technology start-up secures funding from Mercia Fund Management") UBS O’Connor Global Multi-strategy Alpha.

“Earlier in the year, we were quite happy to allow more of our long picks to be in European names and have more short picks in the U.S., whereas now we’re [saying consciously ‘ok let’s put a higher](https://www.financedigest.com/ds-smith-says-cardboard-box-volumes-strong-flags-higher-costs.html "DS Smith says cardboard box volumes strong; flags higher costs") hurdle on European longs and a lower hurdle on European shorts, and vice versa for the U.S.’.”

Ahkong also highlighted a divergence in the regions’ monetary policy – with more rate hikes and a longer path to any rate cuts expected in Europe – and the excitement around [artificial intelligence](https://www.financedigest.com/types-of-artificial-intelligence.html "artificial intelligence"), as favouring the U.S.

Other [fund managers](https://www.financedigest.com/mercia-fund-management-partners-with-innovate-uk-on-the-investment-accelerator-programme.html "Mercia Fund Management partners with Innovate UK on the Investment Accelerator programme") are also flipping away from Europe.

[Bank of America’s June fund manager survey](https://www.financedigest.com/open-banking-is-a-game-changer-for-millennials-new-survey-finds.html "Open Banking is a Game Changer for Millennials, New Survey Finds"), which polled 285 managers with $764 billion in assets under management, showed investors allocation to U.S. equities surged 14 percentage points in June, while allocation to euro zone [stocks](https://www.financedigest.com/mutual-funds-vs-stocks-which-is-better.html "stocks") fell 11 percentage points.

Allocation to [technology stocks](https://www.financedigest.com/chatgpt-mania-pumps-up-chinese-ai-technology-stocks.html "ChatGPT mania pumps up Chinese AI technology stocks") was little changed in June but, at net 16% overweight, investor positioning was at its highest since December 2021.

When the [technology sector](https://www.financedigest.com/why-trust-and-technology-are-the-perfect-partnership-to-rebuild-the-financial-sector.html "Why trust and technology are the perfect partnership to rebuild the financial sector") outperforms significantly, the U.S. S&P 500 index will outperform its European counterparts,” said Geoffroy Goenen, head of fundamental European equity management, at [fund manager](https://www.financedigest.com/cloud-based-digital-logistics-platform-secures-further-funding-from-mercia-fund-management.html "Cloud-based digital logistics platform secures further funding from Mercia Fund Management") Candriam.

This [key sector represents close to 50% of the current S&P 500 today](https://www.financedigest.com/staying-agile-the-key-to-longevity-for-todays-challenger-banks.html "Staying agile: The key to longevity for today’s challenger banks") (if you were to include social media and biotech), whereas in Europe its close to just 10%.

An equal-weighted version of the S&P 500, which dilutes the impact of the large-cap [tech stocks](https://www.financedigest.com/markets-mixed-as-tech-boosts-us-stock-futures-europe-dips.html "Markets mixed as tech boosts US stock futures, Europe dips"), is up just under 4% in 2023.

## TURNAROUND

Part of the [European market’s](https://www.financedigest.com/white-bullets-collaboration-with-polands-sygnal-association-makes-a-significant-dent-in-ad-funded-piracy-in-this-key-european-market.html "White Bullet’s collaboration with Poland’s Sygnał Association makes a significant dent in ad-funded piracy in this key European market") outperformance earlier this year was down to low expectations. [European shares](https://www.financedigest.com/european-shares-kick-off-november-on-bright-note.html "European shares kick off November on bright note") traded at their biggest discount to U.S. peers on record last September. But that valuation gap narrowed when natural [gas prices](https://www.financedigest.com/eu-seeks-to-break-impasse-over-gas-price-caps-no-regret-plan-floated.html "EU seeks to break impasse over gas price caps, ‘no regret’ plan floated") fell in January, eliminating much of the concern around the economic outlook for Europe.

Hopes that [Europe would benefit broadly from China’s economic reopening also boosted sentiment](https://www.financedigest.com/unilever-downbeat-on-europe-china-consumer-sentiment.html "Unilever downbeat on Europe, China consumer sentiment"). In reality, gains were largely restricted to [German industrials](https://www.financedigest.com/german-industrial-orders-drop-in-sept-on-foreign-demand-slump.html "German industrial orders drop in Sept on foreign demand slump"), travel and leisure and major luxury names, and even those stocks fell to seven-week lows in late May.

We were in a bit of a sweet spot with European equities through the fourth quarter of [last](https://www.financedigest.com/crypto-investors-step-up-risk-management-after-last-years-meltdowns.html "Crypto investors step up risk management after last year’s meltdowns") year and first quarter of this year,” said Graham Secker, chief European equity strategist at Morgan Stanley.

That has started to shift in the last one or two months, as sentiment around China has got weaker again,” he said, also pointing to the outperformance of tech [stocks and European](https://www.financedigest.com/european-stocks-slip-on-dour-german-sentiment-survey-ahead-of-powell-speech.html "European stocks slip on dour German sentiment survey ahead of Powell speech") macro data rolling over.

The [euro zone economy](https://www.financedigest.com/inflation-weighs-on-consumer-morale-in-euro-zones-big-three-economies.html "Inflation weighs on consumer morale in euro zone’s big three economies") was in technical recession in the first quarter, data from European statistics agency Eurostat showed last week.

“To us, both Europe and the U.S. look ugly,” said Hani Redha, [global multi-asset portfolio manager](https://www.financedigest.com/a-report-on-global-clinical-trial-management-system-market-by-pmr.html "A Report On Global Clinical Trial Management System Market By PMR") at PineBridge. “But Europe looks even more unattractive than the U.S., because the temporary good [data from Europe is really going to turn.”](https://www.financedigest.com/auriga-announces-new-analytics-software-module-to-help-banks-turn-data-into-results.html "Auriga announces new analytics software module to help banks turn data into results")

Citi’s European economic surprise index shows [euro zone](https://www.financedigest.com/euro-zone-posts-record-trade-deficit-in-august-amid-soaring-energy-prices.html "Euro zone posts record trade deficit in August amid soaring energy prices") data has missed expectations for weeks, compared with the United States, where data has beaten forecasts.

This is also playing out in currency markets, where the euro has fallen 1.8% since its early May highs, despite a recovery this week. Barclays analysts say this is due to the “tough macro backdrop” of [slowing growth in Europe and in China](https://www.financedigest.com/china-nov-export-growth-slows-but-imports-accelerate.html "China Nov export growth slows but imports accelerate"), and resilient data in the United States.

The euro is likely to struggle in coming weeks awaiting a more positive [global growth](https://www.financedigest.com/global-growth-headed-down-as-inflation-surge-to-endure.html "Global growth headed down as inflation surge to endure") trigger, potentially in the form of China stimulus,” they say.

(Editing by Alex Richardson)


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