Value trade finding more takers beyond US shores

As Wall Street ponders over the longevity of the ‘value trade’ after a miserable few weeks of performance in the US, the same could be just getting started outside the country.

For all the dominance of mega-cap growth names, US stocks led the world during the cyclical upswing in the first half of the year — and that means other regions are now primed for a catch-up.

Let us consider Europe. With a far more economically sensitive equity market, a vaccine roll-out finally closing the gap to the US and business activity gathering speed, firms from Lombard Odier to Blackrock are recommending investors to boost their exposure to the region.

“The post-pandemic growth relay has shifted,” Luca Paolini, chief strategist at Pictet Asset Management, wrote in a note. “From China to the US and now to the euro zone.”

With global stocks stabilising on Friday following a slump, the Stoxx Europe 600 Index jumped 1 per cent compared with 0.5 per cent for S&P 500 futures.

That’s a contrast to the year so far. The US benchmark gained 15 per cent in 2021 through Thursday, while its European peer climbed about 13 per cent. At the same time, a US index of value shares outpaced a rest-ofworld gauge by more than 6 percentage points, according to MSCI indices.

It all means European shares look cheap. Members of the Stoxx 600 trade at less than 17x their expected earnings, compared to 21x for stocks in the S&P 500. In the UK, it’s even more dramatic — FTSE 100 companies trade at an average 13x the following year’s earnings.

“The Euro Zone and UK equities still trade at relatively cheap multiples, despite their exposures to both the global recovery and reflation themes,” Stephane Monier, chief investment officer at Lombard Odier, wrote in a note.

are where we see the greatest likely benefits from economic re-openings, an acceleration in relative earnings momentum as well as attractive valuations.”

while European equity funds drew $16 billion last quarter, the strongest flows in four years, they stand to gain even more given $230 billion of outflows over the last three years, Sanford C Bernstein strategists pointed out in a Friday note.

It helps that the region’s economic growth is also likely to accelerate — European Union officials markedly raised their outlook for the euro-area economy this week. “We see a sizable pickup in activity helped by accelerating vaccinations,” Blackrock Investment Institute strategists wrote in their mid-year outlook this week, as they shifted to overweight on European shares and to neutral on US equities.

“Valuations remain attractive relative to history and investor inflows into the region are only just starting to pick up.”

Of course, the bull case depends on a conviction that economic momentum is only poised to accelerate. There remain fears that new Covid variants can set back the global recovery, which in any case may be constrained by labor shortages and supply bottlenecks — both legacies of the pandemic.

Concerns about growth momentum are part of what has stalled the reflation trade in the US Treasury yields sunk to a four-month low this week, and a long-short value strategy is down again in July after sliding the most since January 2020 last month.

Giant growth shares like Amazon.com and Apple — the kind Europe doesn’t have — have been back in the ascendancy. At Citigroup Inc., strategists say it might be too soon to worry.

“Strong EPS momentum should provide further support for global equities in H2CY21, but monetary tightening will loom larger into 2022,” strategists including Robert Buckland and Beata Manthey wrote in a note. “The UK remains our favorite value trade.”