U.S. investors are taking notice of European stocks, and they enjoy what they see.
The victory by centrist Emmanuel Macron in France’s presidential election May 7, readily dispatching far-right euroskeptic Marine Le Pen, reassured many that the tide of antiestablishment sentiment sweeping across the U.K. and the U.S. last year has ebbed—at least for now. Indeed, many investors seemed to have come to that decision before the votes were cast in France.
Improving gains together with political risks that were subdued saw last week European equities experience their biggest weekly inflow on record, noted analysts at Bank of America Merrill Lynch, mentioning EPFR data.
Scott Clemons, chief investment strategist at Brown Brothers Harriman, is taking an incremental approach, having “ dialed ” client exposure to Europe up since last summer.
The European market appears to have finally found its basis, he said, in a phone interview. If there’s a little reluctance in my voice, it’s because it appeared to have discovered a footing several times over the past six or seven years,” only to retreat somewhat.
But at the margin, purchasing managers indexes appear complete and better signs of economic action continue to pick up, leaving Clemons assured in a turn for the better. Really, the Markit eurozone composite purchasing managers’ index reach a six-year high of 56.8 in April, marking the 46th consecutive month of expanding private-sector action across the area. A PMI reading of 50 or above signifies healthy economic expansion.
And that is being represented in corporate gains, which are revealing signals of life, the Brown Brothers Harriman strategist said.
European equities also remain cheap relative to the U.S., he notices, with U.S. companies trading at around 22 times trailing 12-month gains versus 17 times for European businesses.
U.S. stocks have been the main driver of global equity market increases in the years since the fiscal crisis.
European stocks have already seen some outperformance in 2017, with the MSCI Europe ex-U.K. index is up around 15% in dollar terms year to date, versus a 6.9% rise for the MSCI U.S. index and a 7.3% rise for the S&P 500 SPX, 0.48% The pan-European Stoxx 600 index SXXP, -0.09% is up nearly 14%.
Those gains may make about chasing European stocks in the near term, some analysts cautious.
And around 15% of that international allocation is made up of European stocks, up from around 8% in the middle of this past year.