Major European stock indices hit record highs on Friday and achieved their largest weekly gains since the end of January, as bets on interest rate cuts in the region continued to increase and the strong financial reporting season also stimulated risk appetite.
In fact, as we mentioned in yesterday's report, with the Federal Reserve reluctant to cut interest rates, Asian central banks are also hesitant to act recklessly. Currently, a "huge pie" may be falling towards the European stock and bond markets, which are the first to cut interest rates. From the recent market performance, the accelerating upward momentum of European stocks has indeed not disappointed people.
As of Friday's close, the European Stoxx 600 index rose another 0.8%, reaching a new historical high. This week's cumulative increase reached 3%, the largest since late January. On that day, most industry sectors experienced gains, with retail, construction, and utilities leading the way, while the chemical, real estate, and automotive sectors performed relatively poorly.
At the same time, the FTSE 100 index in the UK, the CAC 40 index in France, and the DAX index in Germany all hit record highs on Friday, with their stock indices rising by 9.1%, 9.0%, and 12% respectively for the year.
(European stock index annual growth chart)
The European blue chip index, the Stoxx 50 index, also hit a new high since November 2000 on Friday. The index has risen by a cumulative 12.4% since the beginning of this year, outperforming many similar global stock indices.
From the bullish market factors behind it, the unexpectedly strong performance of European companies in the current financial reporting season undoubtedly adds a lot of confidence to the journey of European stocks to new highs. According to LSEG data, 58.8% of Stoxx 600 index companies that have released profit reports so far have exceeded expectations, while the long-term average is 54%.
Of course, behind the upward logic of European stocks, European central banks have taken the lead in lowering interest rates among developed economies worldwide, and their role cannot be ignored.
Earlier this week, the Bank of England hinted that it would cut interest rates in the summer, while the Bank of Sweden cut rates for the first time since 2016. Coupled with the Swiss central bank, which had already lowered rates early in March, this highlighted the divergence in monetary policy paths between Europe and the United States and boosted the attractiveness of European assets.
Pablo Hernandez de Cos, member of the European Central Bank Management Committee and Governor of the Bank of Spain, also stated on Tuesday that if consumer prices in the Eurozone no longer experience drastic fluctuations - i.e. inflation remains unchanged - the European Central Bank can consider announcing its first rate cut at next month's interest rate meeting.
There are many opportunities for European stocks
Florian Ielpo, head of macro department at Lombard Odier Asset Management, pointed out that "risk appetite in all European markets, from stocks to bonds, from credit to commodities, is significantly increasing."
"Fundamentally, the overall environment is favorable for venture capital, stocks, corporate bonds, and commodities," said Ulrich Urban, head of multi asset strategy and research at Berenberg, who sees opportunities "beneath the surface," including strategies that are more inclined to invest in Europe rather than the United States.
Market insiders have pointed out that funds in the European stock market have been betting heavily recently, and the general trend of interest rate decline may boost mid cap European stocks that are sensitive to interest rates - some utility and real estate stocks with long-term low stock prices. Public utility stocks are often seen as an alternative to bonds, while real estate stocks also directly benefit from the trend of interest rate cuts.
In addition, small cap stocks that have long been abandoned by the market have faced widespread selling during the European Central Bank's interest rate hike cycle due to their huge exposure to floating rate debt and relatively weak profitability. But with the possibility of the European Central Bank cutting interest rates in June, there may also be a significant reversal in the attitude of funds towards small cap stocks.
Alberto Tocchio, Head of European Equities and Themes at Kairos Partners SGR, said, "Raw materials, utility stocks, and small cap stocks are the three important areas where I will begin to increase my holdings. We have already started doing so in all funds."
The UBS strategist team led by Andrew Garthwaite recently stated that they now prefer European stocks over US stocks. The current investment priority ranking of the team is Japan, the United Kingdom, Europe (outside the UK), emerging markets, and finally the United States. UBS strategists have listed the following five reasons for being bullish on European stocks:
① The economic data of the Eurozone has begun to improve, with indicators such as PMI suggesting that the gap in GDP growth rates between the United States and Europe is expected to narrow;
② The trend of interest rate cuts by European central banks has begun. The Swiss central bank and the Swedish central bank have taken the lead in taking action, and the Bank of England and the European Central Bank are also expected to follow up next month;
③ According to the adjusted P/E ratio of the industry, the valuation of European stocks is currently cheaper, about 18% lower than that of American stocks;
④ From the perspective of profit expectations, the depreciation of the euro and the rebound in PMI indicate that the revised earnings per share of European companies may be better than those of the United States;
⑤ European companies have industry leadership and uniqueness, with a 40% share in the capital market that they do not have American competitors.
