Equity Strategy: When will Eurozone equities be able to move on?

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

After meaningfully lagging the US in 2nd half of last year, Eurozone equities showed some relative stabilization in Q1/Q2, before breaking lower most recently on a spike in French political uncertainty. We have closed the UW on Eurozone vs the US in Q1, driven by the improving Growth - Policy tradeoff in the region, but we believed that it was too early to expect Eurozone to move to an OW vs the US. Now, should one use the current dip to go long? On the positive side, Eurozone CESI is significantly above US one. At the same time, ECB has started easing, while Fed could stay higher for longer, and Eurozone valuations relative to the US are as cheap currently as at the extremes of TMT sell-off, GFC and Euro peripheral crises. Having said that, Eurozone equities are not showing oversold extremes. In fact, on equal weighted basis, Eurozone stocks were trading above US in Q2, and that is still the case, even fully taking into account the French driven weakness. The key will be any improving visibility with respect to the political backdrop. Here, we do not see the current French risks as a game changer for the region. The institutional setup is much more robust than during initial Euro crises. While the snap elections offer increased near term risks, they might be reducing longer term ones, and French government bond spreads to Germany are up 30bp, only higher during 2011 extremes. Now, we do fear that proverbially things might need to “get worse in order to get better”. The chances are that a potential new French government will likely try to test the boundaries of what they can do. Financial markets might end up needing to push back against the more aggressive fiscal easing.  Given this, the risk of further drawdowns will likely not be elevated only between the two rounds of voting and in the immediate aftermath, but also for a while post elections. Overall, we think that, as we move through 2H, there is likely to be a good entry point to buy Eurozone, to go OW vs the US, but for now we stay on the sidelines given the elevated risk of further drawdowns and no capitulation visible. We keep our Defensive sector tilt, and stylewise, we keep OW Growth vs Value stance, believing that it will continue to build on 14% ytd performance in the US and 7% in Europe.

 

This podcast was recorded on 24 June 2024.

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