(Boursier.com) — Bank of America Global Research teams remain cautious on European equities. The latter are reversing a historic period: after a 12% outperformance between August 2022 and January, the biggest rise in more than 20 years, driven by a near-perfect combination of strong upside surprises in macroeconomic data from the Eurozone (due to the easing of the energy crisis in the region) and rising real bond yields (which is boosting Europe’s relative performance given the region’s pro-value tilt). However, after hitting a three-year high in March, the relative price index in Europe fell 6%.
The underperformance is not due to a lack of exposure to technology, but to weakening macroeconomic momentum: while many see Europe’s recent underperformance as a function of its relative lack of exposure to the tech sector, which has been boosted by optimism around AI, even excluding tech, a similar degree of underperformance is seen. Europe’s relative weakness is thus rather due to a sharp reversal in its relative macroeconomic momentum, which, in PMI terms, fell to a seven-month low, marking the sharpest deterioration in relative growth momentum since 2014 (excluding fluctuations during the pandemic). This picture is also reflected in macro surprises, with those in the Eurozone recently hitting an 11-month low, while those in the US held up.
BoA thus remains ‘underweight’ on Europe compared to global equities: the resilience of US growth has been surprising, but experts still expect the impact of the continued deterioration of the credit cycle (visible in both bank lending and actual credit flow surveys) is translating into macro weakening, as the tailwinds to growth fade. However, BoA also expects the situation in the Eurozone to continue to deteriorate due to the sharp tightening of credit conditions and a lesser contribution from the waning energy crisis. In addition, the bank anticipates a decline in US real bond yields – a headwind for the relative performance of European equities – as US inflation fades in response to easing supply-side tensions. Overall, the BoA’s macro assumptions imply about a further 5% underperformance for European equities relative to global equities by Q4, hence its ‘underweight’ advice.
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