Europe grew faster than the US last year. Its markets are outperforming too - CNN

Europe’s stock markets have beaten Wall Street by the biggest margin in more than three decades over recent months as its economy looks set to dodge a recession many thought inevitable just a few weeks ago.

Since late September, European market benchmarks have risen by 20 percentage points more than Wall Street — the largest outperformance seen in a four-month period in the past 30 years.

Though over the past two weeks Europe’s stocks have posted slightly smaller gains than US equities, this has done “little to erode their outperformance since September,” Graham Secker, chief European equity strategist at Morgan Stanley, told CNN.

The overall rise is a reversal of a 15-year trend that has seen US stock indices, flush with fast-growing tech companies, consistently beat those across the Atlantic.

“It had been quite a sharp turnaround and the sharpest in a while,” Thomas Mathews, senior markets economist at Capital Economics, told CNN.

In a note earlier this month, Morgan Stanley said the reversal was driven by a combination of falling gas prices and better-than-expected economic data in Europe, as well as China’s swift reopening.

Similarly, Mathews at Capital Economics noted that the “steady outperformance” of European stocks can be dated back to a decline in European wholesale gas prices from their all-time high reached in late August. Europe’s benchmark gas contract is now trading at €57 ($62) per megawatt hour, sharply down from the peak of €346 ($375) per megawatt hour.

Consumer price inflation in the region has also ticked down in recent months. In the countries that use the euro, inflation fell from a record high of 10.6% in October to 8.5% in January, preliminary data from the EU statistics office showed on Wednesday.

More broadly, investors have been encouraged by Europe’s economic resilience over the past year. GDP in the eurozone grew 3.5% in 2022 — more than in the United States or China — including a slight expansion in the final quarter, according to a preliminary estimate by the EU statistics office.

The International Monetary Fund forecast on Monday that Europe’s annual rate of growth was likely to slow to 0.7% this year. And GDP may yet shrink in the current quarter, but the risk of a recession has receded.

“The eurozone is now likely to avoid a technical recession, defined as two quarters of negative growth in a row,” Salomon Fiedler, an economist at Berenberg bank, wrote on Wednesday.

The region stands to benefit from a bounce-back in demand for European goods and travel in China.

Kasper Elmgreen, head of equities at Amundi, a French asset management firm, told CNN he is following the impact of China’s reopening on Europe “very closely.”

“You have 1.4 billion Chinese that are coming out of lockdown,” he noted. “We’ve kind of got the blueprint now, having seen this in other regions, and typically there’s a very significant amount of pent-up demand.”

According to Michael Hewson, chief market analyst at CMC Markets, investors are now better-off putting their money to work in Europe. An investor in a tracker fund for the Euro Stoxx 600 can expect to make a 3.2% return this year, compared with 1.6% for the S&P 500, he told CNN, noting that Europe has more “value” stocks than the United States.

Investors have traditionally seen US equities as “growth” stocks — companies expected to expand quickly and make big returns — while European equities have been viewed more as “value” stocks, or shares that trade at a lower price than they are worth based on their financial performance.

Over the past decade, investors poured money into fast-growing tech stocks, aided by ultra-low interest rates. In that time, the tech-stock heavy Nasdaq (BANK) soared 300%, compared with Germany’s DAX (DAX), which only doubled, Hewson said.

Mathews at Capital Economics noted that “there’s not like an Amazon or a Facebook equivalent [in Europe] … in terms of these massive companies making super profits,” adding that between 2007 and July 2022 investors could expect to make an annual return of 9.3% from the S&P 500 and only 4.7% from the Euro Stoxx 600. (SXXL)

But tech companies have taken a beating recently. The Nasdaq shed 33% of its value last year as high inflation and interest rate hikes put a check on companies’ growth. Tech companies, including Microsoft and Alphabet, announced thousands of layoffs last month.

From the second half of last year, Mathews said, analysts started to reduce their earnings forecasts for many US companies as it became apparent that some of the pandemic trends that kept people spending most of their time at home weren’t holding up.

A multi-year decline in interest rates had also supported growth stocks, Elmgreen at Amundi said, adding that the recent outperformance of European stocks marked a “paradigm shift.”

“This is the beginning of a longer-term trend,” he said.

However, Europe is not out of the woods yet. Though inflation has started to cool, it is still historically high, which could keep interest rates elevated for some time. High interest rates make it more expensive for companies to borrow to expand their business, raising doubts about their future earnings.