Why European stocks beat their US counterparts: Financial experts see potential for European stock markets. US investors are increasingly focusing on Europe.

Why European stocks beat their US counterparts: Financial experts see potential for European stock markets. US investors are increasingly focusing on Europe.

European stock markets are coming into focus

Investors are betting that Europe will lead the next leg of the global stock rally, widening their bets as expensive U.S. stock markets evoke memories of the dot-com bubble.

According to Goldman Sachs Group, hedge funds now have greater exposure to European equity markets than ever before compared to the global MSCI benchmark. According to a recent survey by Bank of America, mutual funds have also increased their allocation to stocks in the region more than at any time since June 2020.

The prospect of Europe outperforming U.S. equities has merit," said Paul Brain, deputy chief investment officer of multi-asset at Newton Investment Management, in an interview in London. "The major U.S. tech stocks now appear to have fully priced in a best-case scenario. They could face headwinds from competition and regulation after the massive rally."

Europe: Stocks cheap compared to US stocks

Hedge funds' allocation in Europe to the MSCI All-Country World Index reached its highest level on record last week with an overweight of 5.8%, according to Goldman Sachs data.

Despite the gains in Europe this month, the Stoxx 600 index still appears cheap as a benchmark. Its forward 12-month price-to-earnings (P/E) ratio of about 14 is only slightly higher than its long-term average, according to data compiled by Bloomberg. In contrast, the S&P 500 index is in expensive territory, even if you exclude the highly valued technology stocks.

A greater weighting of more cyclical sectors in Europe could work in its favor as economies such as Germany and the UK look to avoid a prolonged recession and global growth picks up. Easing interest rates could also help.

All long or what?

A drastic decline in short positions also shows that sentiment towards European stock markets is improving, according to S&P Global. Estimated short positions in the region were cut to less than 0.2% of total market capitalization late last year, the lowest level in at least a decade. They have remained near that level ever since.

BlackRock's EMEA iShares team, which includes Karim Chedid and Laura Cooper, sees signs that client funds are flowing back into Europe.

“We leaned on Europe from a tactical momentum perspective,” they said in an interview. “We are seeing some inflows, including from US investors, so European stock markets have warmed up.”