The U.S. economy and stocks face a difficult year — and could even lag Europe
A trader monitors financial data at the Frankfurt Stock Exchange in Germany.
Alex Kraus | Bloomberg | Getty Images
Last year took the U.S. economy and markets on a bumpy ride — and the year ahead also looks tough. It’s led some strategists to argue 2023 could be Europe’s time to shine.
Zeynep Ozturk-Unlu, Deutsche Bank’s chief investment officer for EMEA, sees a case for Europe outperforming both economically and in capital markets, with contraction and recession fears becoming “more accelerated” in the U.S. than in Europe.
This is despite Europe facing its own challenges, Ozturk-Unlu said, including the ongoing war in Ukraine, the energy crisis and inflation that has not yet peaked — and is unlikely to hit the European Central Bank’s 2% target until mid-2024 at the earliest.
“Europe has been in expansionary fiscal policy mode for quite a while, especially due to the energy crisis,” she told CNBC’s “Squawk Box Europe” Monday. “But beyond that, not only the internalization of U.S. manufacturing and consumption within the U.S., Europe is also betting on the reopening of China and it is going to give positive tailwinds to the European growth story.”
European GDP growth last outpaced the U.S. in 2017, though final 2022 figures have not yet been released.
Ozturk-Unlu pointed to the diversification of sectors in Europe compared to the U.S. and sustainable production growth, particularly in Germany and France, as a case for Europe having more stable economic growth.
When it comes to stocks, she continued: “It doesn’t mean Europe is completely immune and is in great shape, but in relative terms the shift from growth [stocks] to value actually gives a little bit more opportunity to Europe compared to U.S.”
In the year to date, Europe’s Stoxx 600 index has risen over 5% versus a 3.4% gain in the U.S. S&P 500.
Despite clocking their worst performance since 2018, European shares also outperformed the U.S. last year, ending with a 13% loss compared to 19.4% for the S&P.
“There’s this opportunity coming from the significant undervaluation of Europe compared to the U.S.” Ozturk-Unlu added.
“That’s why we think that the world outside of the U.S. will outperform the U.S., and Europe in relative terms, in equities, will outperform.”
Brighter outlook, but risks remain
Deutsche Bank is not alone in its more optimistic outlook for Europe.
Further tightening by the Federal Reserve, China’s reopening providing a boost to European economies, euro zone fiscal stimulus, and energy prices coming down were all cited by other strategists CNBC spoke to as reasons Europe’s economy could outperform.
Karsten Junius, chief economist at Swiss bank J. Safra Sarasin, flat GDP growth in the euro zone this year, versus a 0.5% contraction in the U.S.
However, he does not expect this to translate into outperformance in equity markets, he told CNBC by email. He said this was because of factors including the recent appreciation of the euro, which tends to weigh on earnings with a three-month delay; and greater monetary policy headwinds in the euro area, with the European Central Bank behind the Fed in its tightening cycle.
A number of strategists have argued that while markets were driven by monetary policy in 2022, they will be more guided by economic data and earnings this year.
They include Joost van Leenders, senior investment strategist at Van Lanschot Kempen.
Unlike Junius, he was more cautious that Europe’s economy will outperform the U.S. on a year-average basis; but said stocks could surprise to the upside.
“If there is a recession in Europe and the U.S., there needs to be downgrades in terms of weaker earnings across the board — the U.S. looks more progressed in that sense,” he told CNBC via phone.
“But if the recession in Europe turns out to be very shallow, then because the discount of Europe to U.S. is almost as wide as it has ever been, it could be a trigger to unlock that valuation discount,” he said, as long as the Fed doesn’t start cutting rates and boost U.S. growth stocks.
Recent data has shown U.S. December PMI figures for services fell to a four-month low and manufacturing fell to its lowest level since the pandemic as optimism was at its gloomiest for two years; while equivalent figures in the euro zone remained in contraction but improved month-on-month and surprised to the upside.
Paul O’Connor, head of the multi-asset team at asset management firm Janus Henderson Investors, agreed that there were “good reasons” to believe an era of U.S. stock market outperformance had begun a reversal that could extend through 2023 and beyond.
“While post-Global Financial Crisis U.S. equity outperformance was underpinned by superior U.S. earnings momentum, this influence was amplified by a relative valuation shift in favor of U.S. stocks. Both trends are now reversing. While U.S. stocks look expensive relative to bonds and their own history, stocks in most other markets look fairly valued,” he told CNBC.
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