Recovery optimism ignites bullish trades in Europe
Europe’s vaccine campaign may be beset with delays, communication blunders and missteps, but in markets at least investors are united in wagering that the pandemic is on the way out.
Stocks in the region have vaulted back to records, and the euro capped its best week against the US dollar so far this year.
A big turnaround in projected profits for corporate Europe shows a brewing recovery in the investment and consumption cycle.
Analysts are ratcheting up estimates for European miners, banks, car makers and oil producers. Upgrades now outnumber downgrades by most in over a decade, according to data from Citigroup Inc.
Whether all that enthusiasm is justified will become clearer this month, when earnings season kicks off. Behind the bullish shift in markets is a belief that Europe will be successful in immunising the bulk of its population within a few months, and evidence that the US and Asia are on a solid path of recovery.
From food giant Nestle SA to luxury powerhouse LVMH Moet Hennessy Louis Vuitton SE, investors are counting on Europe’s flagship names to reap windfall profits.
“The market rightly anticipates accelerating earnings growth,” said Olga Bitel, global strategist at William Blair Investment Management.
“The difference this time is magnitude. Specifically, the US and Europe are likely to experience the mother of all recoveries over the next several years.”
France met its goal of inoculating 10 million people a week ahead of schedule and Germany has doubled its pace of vaccinations. Germany’s economy is also getting a boost from the wider economic recovery.
Granted, European markets still look sleepy compared with elsewhere. The euro isn’t far from its five-month low against the dollar, and there’s no sign of a speculative frenzy bubbling up anywhere in equities.
Instead, the investment case for Europe is often one about valuation discounts.
To bet on the comeback story, JPMorgan Chase & Co’s equity derivatives team has told clients to buy calls on the Euro Stoxx 50 and sell them on the S&P 500.
The bank’s strategists tout Europe’s cyclical bent and relative cheapness as all reasons why stocks can keep outperforming.
Despite that optimism, there’s plenty evidence that Europe’s recovery is still on shaky ground. Concern over rare blood clots linked to the AstraZeneca shot has held back vaccination efforts. There’s also growing alarm about a potentially long delay before money from Europe’s €750 billion recovery fund reaches crisishit countries.
For now, all eyes are on consumer spending.