Can European stocks finally outperform US this year?

James Bevan, CIO of CCLA, talks to IGTV’s Victoria Scholar about the relative attractiveness of US versus European equities.

Can European stocks finally outperform US this year?

US stocks have sharply outperformed their European counterparts over the last year. The S&P 500 surged by more than 28% from the start of 2017 until last month’s peak. That figure dwarfs returns for the Euro Stoxx 50, which came in just below 12%. The underperformance comes despite numerous calls from analysts that Europe could overtake the US in terms of equity returns. The question now is whether 2018 is the year this call finally materialises?

Targeting S&P 500 at 3100 by year-end

James Bevan, CIO of CCLA, says there is an equity price tug of war taking place, with sky-high valuations pulling against very strong economic growth. Bevan believes that growth will win out in the end, sending equities higher. He is targeting 4000 for the Euro Stoxx 50, and 3100 for the S&P 500 by year-end, dependent on an improving earnings picture in 2018 and 2019.

Bullish towards US equities

There are a number of reasons to be constructive towards equities on both sides of the Atlantic. Bevan says that US dollar weakness will boost US globally facing companies, as they look to repatriate cash following President Trump’s tax cut. He also says Trump’s fiscal expansion will be positive for US equities.

Constructive but selective in Europe

In Europe, Bevan is constructive but more selective. He notes that there are still potential political headwinds with Italy’s election on the horizon. In France, President Emmanuel Macron is very good news for the economy, he argues, although implementing reform will be challenging. In terms of the outlook for the European Central Bank (ECB), he says the first rate rise is still a very long way off, perhaps not until 2019. Bevan expresses caution around quantitative tightening in the eurozone. He says it is hard to know how markets will respond when the ECB reigns back policy.

European stock picks

Credit Agricole and Santander are two stocks that Bevan points to in Europe which look attractive. Credit Agricole, he says, is cheap and will benefit from improving credit trends in France. Meanwhile Bevan suggests Santander in Spain is a good cyclical bank to hold onto, partly for its exposure to Latin America.

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