Amid progressing vaccination programs across Europe, economic prospects continue to improve for the region as countries reopen. While demand for US equities has long outpaced European equities, recent flow trends and economic prospects suggest Europe may soon start to catch up with its cross-pond counterpart.
On 7 April 2021 we wrote about the case for getting exposure to the European recovery through eurozone dividends. The trend has continued and, with vaccinations progressing in the European Union and already well advanced in the United Kingdom, economic prospects continue to improve as countries reopen. While European equity exposures have long been less loved than their US counterparts, the recent surge in flows toward European equity exposures – from US and European investors alike – may add to the potential outperformance of the region for several reasons.
The Economy: Reopening Having an Impact
Amid economic reopening, service activity is picking up strongly across the eurozone even as manufacturing powers ahead at full speed. Preliminary readings on the May purchasing managers indices on 22 May 2021 were highly encouraging. The eurozone manufacturing index was practically unchanged at an elevated 62.8, while the service index surged almost five points to 55.1. As economies reopen and demand is unleashed more fully, State Street Global Advisors expects to see inflationary pressures broaden in the coming months. Meanwhile, we also expect robust growth in developed markets: 5.3% for the US, 4.7% for Germany, 5.7% for France, 6.2% for the UK.1 Our European forecast is generally higher than the market consensus.
Figure 1: 2021 GDP Growth Forecasts – Evolution
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 7 May 2021. Forecasts are based on certain analyses and assumptions and there is no guarantee they will be realised.
Earnings Growth: Europe has the Highest EPS Growth of Developed Markets
Robust economic growth could also continue to create a positive backdrop for earnings, which have been strong, while low rates and demand for higher yielding credit has allowed even some of the lowest-rated companies to engage in balance sheet strengthening. Europe has the highest EPS growth expectations across developed markets at 30.4% versus 25.4% for the MSCI World Index (as of 19 May 2021) and also trades closer to longer-term averages relative to history (see Figure 2) than peers.
Figure 2: Price Earnings and EPS Growth
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 19 May 2021. Chart references MSCI regional indices; MSCI EM refers to the MSCI Emerging Markets index. PE = price to earnings ratio; EPS = earnings per share; NTM = next twelve months; LTM = last twelve months.
Follow the Flows: ETF Investors Leading the Way?
Over the past few weeks, the positive flow trend toward European equity exposures has accelerated. ETF investors bought European equities to the tune of $6.2 billion, levels we last saw in January 2018.
Figure 3: European Equity Region ETFs AUM and Flows – Monthly ($mn)
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 25 May 2021. Flows are as of the date indicated and should not be relied upon as current thereafter.
How to Play These Themes
Given the backdrop of continued economic pick-up and potentially attractive relative valuations in Europe, investors looking to add to their European exposures have more than 20 different shades of European equity exposures available from SPDR ETFs. This offering covers more than $7 billion of AUM from broad to focused strategies:
• Pure EMU focus
• UK focus
European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)
European-Domiciled ETP Asset Category Flows ($mn)
Source: Bloomberg Finance L.P., for the period 20-27 May 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
1 Source: State Street Global Advisors, 2021 full-year GDP forecasts as of March 2021. Forecasts are based on certain analyses and assumptions and there is no guarantee they will be realised.
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