Eight years since the bull market has begun, U.S. stocks have trounced their foreign counterparts, as investors bet on America's steady recovery and fast-growing tech companies. Now the table seems to be turning. Overseas markets have attracted more investments this year than the U.S., and Europe in particular, may have finally begun to outperform.
With U.S. and Brazil plagued by political turmoil and Chinese stocks on the downswing, investing in European stocks seems like a prudent move. European equities have witnessed huge cash flow this year on diminished political risks, robust economic growth, greater operating leverage and earnings growth at double the rate of U.S. corporations. Cheaper valuations for European stocks than their U.S. counterparts are also driving the cash flow.
European Stocks Gaining Traction
After delivering less than half the total return of U.S. equities over the past eight years, European stocks are starting to gain momentum. In fact, the Stoxx Europe 600 Index is up more than 15% this year, by contrast, the S&P 500 Index has gained around 5.7% over the same period. The most popular foreign stock benchmark - MSCI EAFE Index - has also outperformed the S&P 500 Index in the first quarter of 2017. Europe accounts for more than two-thirds of the capitalization of EAFE.
Cash has already started to flow across the Atlantic. According to Bank of America Merrill Lynch, investors have moved $13.7 billion to European funds, while the past week's allocation of $6 billion turned out to be the highest one-week flow on record. On the contrary, U.S. equities witnessed a $2.4 billion outflow.
Political Risks Subside
Political uncertainty has ebbed regarding the fate of the European Union. The victory of Emmanuel Macron in the French presidential election, most recently, has given assurance that the political far-right fraction led by Marine Le Pen won't be a disruptive factor anymore. A Marine Le Pen win would have resulted in France pulling out from the European Union, resulting in increased turmoil in the Eurozone.
The positive French election results came just as the wounds were healing from last year's Brexit vote. On the other hand, U.S. markets have already witnessed the biggest sell-off of the year on May 17th after President Trump's business-friendly policies were mired by a string of investigations.
Europe's GDP & Earnings Improve
Europe's GDP is expected to increase about 2%, after growing 1.7% in 2016. Meanwhile, growth in U.S. GDP is expected to expand 1.6% this year. Overseas, purchasing managers' indices are strong, with Germany's at a six-year high. The key economic metric of productivity is also increasing at a faster pace in Europe than in the U.S.
In addition, there is greater operating leverage in Europe compared to the U.S. Analysts at Goldman Sachs Group Inc GS In addition, there is greater operating leverage in Europe compared to the U.S. Analysts at Goldman Sachs Group Inc GS estimated that a 1% increase in revenues produces an average 1.8% rise in earnings at U.S. corporations, but a 2.8% jump at European companies. Along with strong operating leverage and broad-based positive momentum in revisions, Europe's first-quarter earnings show strong recovery on the back of a robust fourth quarter. According to analysis at UBS, halfway through the first-quarter earnings season in Europe, around 63% of companies have reported better-than-expected numbers.
European stocks are relatively cheap compared to their U.S. counterparts. According to Barron's reports, based on expected earnings for this year, the price-to-earnings ratio (P/E) on the Stoxx Europe 600 is 16, versus 18 for the S&P 500.
Stephen Auth, chief investment officer of equity at Federated Investors, Barron's says that BNP Paribas S.A. BNPQY is cheap at 88% of tangible book value with a P/E ratio of 11. Similarly, from a valuation perspective, Unilever N.V. UN and SAP SE SAP are favorites of Benjamin Segal, manager of the Neuberger Berman International Equity Fund NBIIX .
Europe on Sale: Buy These 5 Top Stocks
Political risks being on the backburner, acceleration in economic growth, encouraging earnings results and attractive valuation bode well for European shares. Hence, investing in the same will be judicious. We have, thus, selected five such stocks that flaunt a Zacks Rank #2 (Buy) and a VGM Score of 'A' or 'B.' Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
AirFrance KLMSAAFLYY is an airline company. The company is engaged in passenger transportation. Air France-KLM SA was founded in 1919 and is based in Paris, France. The company has a VGM score of 'B'.
The company has a year-to-date return of 86.6%, higher than the Transportation - Airline industry's return of 18.4%. The company is expected to return 22.9% this year, in contrast to the industry's projected negative return of 5.1%.
Bayer AGBAYRY is a life science company. The company's segments are Pharmaceuticals, Consumer Health, Animal Health and Covestro. Bayer Aktiengesellschaft was founded in 1863 and is headquartered in Leverkusen, Germany. The company has a VGM score of 'B'.
The company has a year-to-date return of 24.6%, more than the Large Cap Pharmaceuticals industry's return of 8.2%. The company is likely to return 8% this year, higher than the industry's projected return of 3.5%.
J D Wetherspoon plcJDWPY owns and operates pubs in the United Kingdom and the Republic of Ireland. The company was founded in 1979 and is headquartered in Watford, the United Kingdom. J D Wetherspoon has a VGM score of 'A'.
The company has given a year-to-date return of 21%, more than the Retail - Restaurants industry's return of 8.9%. The company is expected to return 13.8% this year, higher than the industry's projected return of 6.1%.
Volkswagen AGVLKAY is engaged in developing vehicles and components for its brands. It also produces and sells vehicles, in particular, passenger cars and light commercial vehicles for the Volkswagen Passenger Cars and Volkswagen Commercial Vehicles brands. The company is headquartered in Wolfsburg, Germany. Volkswagen AG has a VGM score of 'B'.
The company has given a year-to-date return of 10.7%, in contrast to the Automotive - Foreign industry's negative return of 8.4%. The company is also poised to give solid returns this year. You can see the complete list of today's Zacks #1 Rank stocks here.
Unilever plcUL operates in the fast-moving consumer goods market. The company operates through Personal Care, Foods, Home Care, and Refreshment segments. The company was founded in 1885 and is headquartered in London, the United Kingdom. Unilever PLC is a subsidiary of The Unilever Group. It has a VGM score of 'A'.
The company has given a year-to-date return of 30.8%, more than the Soap and Cleaning Materials industry's return of 12.6%. The company is expected to return 17.3% this year, higher than the industry's projected return of 7.9%.
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