The great rotation into European equities is likely to get another boost as U.S. President Donald Trump’s shifting stance on global tariffs hits sentiment in U.S. markets.
Trump’s about-turn on import levies is stoking optimism over a smaller-than-feared tariff shock for European companies. At the same time, the policy chaos has led to sharp selloffs in the S&P 500 Index and the dollar.
Just as the U.S. is facing increased uncertainty on inflation and economic growth, Europe’s political outlook has suddenly stabilized. Germany is aiming for big stimulus, the continent is uniting over defense spending, there’s the potential for a ceasefire in Ukraine and corporate earnings are projected to improve.
“We believe European equities have further to go,” said Amelie Derambure, senior multi-asset portfolio manager at Amundi SA. “The economic momentum is in the right direction. It’s going to be amplified by the plan coming from Germany. European stocks are cheaper and underowned compared to US equities,” she said on Bloomberg TV.
With investors ditching the buy-U.S.-growth-at-any-cost mantra, America’s weight in the Bloomberg World Index has fallen to 63% from a peak of 65% in November. While the S&P 500 is down about 2% this year, the Euro Stoxx 50 is up 12% and China’s Hang Seng Index has rallied 19%.
The shift in the world order has inspired several Wall Street strategists, including Deutsche Bank AG’s Maximilian Uleer, to use the expression “Make Europe Great Again” — a play on Trump’s campaign slogan — to suggest a new era of outperformance for the region’s assets.
EPFR Global data show about $12 billion flowed into European equity funds in the four weeks through March 5 — a pace not seen in almost a decade, according to a note from Bank of America Corp. Meanwhile, emerging markets saw the largest weekly inflows in three months at $2.4 billion.
“Price action suggests investors are funding European and Chinese stocks at the cost of the U.S.,” said Mark Taylor, director of sales trading at Panmure Liberum.
Confidence in U.S. assets has particularly faded since Trump won his second presidential term in November. While his protectionist agenda was initially expected to boost local markets, global trading partners have instead responded by threatening retaliatory tariffs.
The Stoxx Europe 600 Index is outperforming the US benchmark by about 11 percentage points this quarter — its best relative showing since 2015.
And while investor allocation to European stocks has jumped this year, some metrics show there’s room for even more exposure. A Bank of America survey last month found only a net 12% of global investors were overweight on the region’s stocks.
Barclays Plc strategist Emmanuel Cau said the gains in Europe so far constituted more of a relief rally rather than signifying a return of long-term capital. But the easing fiscal stance in Germany and the broader European Union has the potential to attract more strategic flows.
“Eventually this could lift growth in Europe above trend, leading investors to strategically rebalance their allocations and drive valuations above average,” Cau said. “This is something not many are positioned for yet, as U.S. exceptionalism has been the playbook for the last two decades.”
--With assistance from Julien Ponthus and Neil Campling.
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