Europe's Booming, but Investors Aren't Making a Cent


Europe’s economic boom and its increasingly stable politics have fulfilled investors’ deepest wishes over the last year. All bar one: European stocks haven’t made them a single euro.

In the past 12 months, the Stoxx Europe 600 has delivered a 1% loss in local-currency terms, accounting for both share-price appreciation and dividends, compared with a 14% total return for the S&P 500.

That’s mainly because Europe’s rosier outlook has boosted the euro by 14% against the dollar during the same period, eroding the value of overseas earnings from local listed companies. Around half the revenues of the Stoxx Europe 600 come from abroad, FactSet data shows. For the S&P 500 it’s only 30%.

Investors are also striking an increasingly cautious note about European stocks, unsure whether profits can continue to surprise on the upside and concerned about the potential threat of protectionism on the region’s export-leveraged indexes.

So, after a period of upward revisions, some investors and banks are beginning to downgrade their expectations for European stocks this year.

“We came into the year quite excited about Europe. But in the past month and a half we have scaled back” exposure to European stocks, said Eric Freedman, chief investment officer at U.S. Bank Wealth Management, which manages $151 billion.

Even measured in dollars, the Stoxx Europe 600 has delivered only 14% returns over the past year, one percentage point less than the S&P 500. Stripping out the surge that followed the victory of pro-market candidate

Emmanuel Macron

in  April’s French presidential elections, European stocks have actually underperformed their U.S. peers in dollar terms. Yet, most analysts and investors say that there is a bigger risk that the U.S. expansion will slow in the near time than Europe’s does.

That said, whether Europe’s economy can continue to surprise on the upside is a big talking point among investors. Economists expect the eurozone’s gross domestic product to expand 2.3% this year, compared with 2.8% growth in the U.S., according to an average of forecasts compiled by FocusEconomics.

The

Citigroup

Economic Surprise Index, a broadly-tracked measure of how expectations are being met, has edged down in the U.S. but remains at multi-year highs, meaning U.S. data is still broadly matching forecasts.

In the eurozone, the index has dropped to its lowest level since March of 2016.

“We still have the synchronized recovery in the global economy,” said Ewout van Schaick, head of multi-asset at Dutch asset manager NN Investment Partners, which has €246 billion ($296 billion) under supervision. “But, at least for the moment, it can’t surprise more to the upside.”

Mr. Van Schaick removed his fund’s bias in favor of European stocks after purchasing managers’ surveys released last week showed that the eurozone economy grew in March at its slowest pace since the start of 2017.

After that data, Citigroup’s strategists also downgraded their expectation of where they believe the Stoxx Europe 600 will finish this year, to 420 points from 460. The index is currently trading at 367.

Last week, Deutsche Bank equity analyst Sebastian Raedler downgraded his forecast of fair value for the index, from 400 currently to 360 this summer, citing declining economic momentum.

Stocks still look cheaper in Europe than in the U.S., with the Stoxx Europe 600 trading at 13.9 times the earnings it’s expected to generate over the next 12 months, compared with 16.1 times for the S&P 500. But the gap has narrowed considerably in the last two months. On top of large selloffs in U.S. equities, analysts have steadily downgraded their expectations for European earnings this year, while upgrading the S&P 500’s, according to data provider FactSet.

“We’ve been relatively cautious on the U.S. versus the rest of the world for some time,” said

Richard Turnill,

global chief investment strategist at BlackRock. “We’ve changed that view.”

Investors also worry about negative impacts for exporters if new U.S. policies trigger a full-blown trade war. Concerns for exporters would heighten if the euro gets a boost when the central bank bond-buying that has kept the currency lower, and stocks higher, is withdrawn in September.

To be sure, most asset managers still see good opportunities in parts of Europe.

Recent concerns about increased regulation for technology companies could be a comparative advantage for European indexes. The tech sector has been the main driver of U.S. stocks over the past year and makes up 25% of the S&P 500, but only 4.6% of the Stoxx Europe 600.

Southern Europe, in particular, still looks attractive for some investors.

While the more internationally focused German DAX index has dropped 5% in the last year, Italy’s more domestic FTSE MIB is up 9%.

“We are of course bullish on Southern Europe,” said

Joseph Oughourlian,

chief executive of European hedge fund Amber Capital. “Northern Europe is historically more exposed to China, tech, and global trade and these are complicated themes right now for an investor.”

Write to Jon Sindreu at jon.sindreu@wsj.com and Mike Bird at Mike.Bird@wsj.com



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