(Boursier.com) — Citi strategists favor European stocks. Rates will peak in the first half of the year, but global earnings will fall 5% to 10% in 2023, they say. Against this backdrop, they are moving to ‘overweight’ European equities, as “bad earnings news is already priced.” The bank’s teams, on the other hand, lower their opinion on the American stock market to ‘underweight’ because market expectations for profits are still too optimistic, especially given the recession predicted by Citi economists in the second half of the year. .
The decision comes after European equities recorded their best performance against Wall Street in the fourth quarter, an astonishing 13% outperformance (in US dollars). Since the end of September, the Stoxx 600 is up 22% in dollars compared to 6% for the S&P 500.
Being cheap certainly helped European equities last year. “In 2022, valuation mattered for the first time since the global financial crisis,” Peter Oppenheimer, strategist at Goldman Sachs, told ‘Bloomberg’. He expects non-US markets to outperform again in 2023. Indeed, despite their rally, European equities continue to be seen as attractive relative to their US counterparts. The forward price/earnings ratio of the S&P 500 is around 17, and is still well above that of the Stoxx 600 (12x).
Europe is also benefiting from hedging shorts and falling volatility thanks to tailwinds such as a weaker dollar and signs of reopening and fiscal support in China, analysts say. At the same time, the United States is suffering from what has driven its continued outperformance over the past decade: its strong tendency to favor technology. Being ‘loaded’ in high-performing value stocks has been a boon for Europe over the past year and, according to Oppenheimer, this trend must continue.
In terms of profits, the Old Continent could also do well. While estimates for companies in the region have ceased to outperform their American counterparts in recent months, there remains a wide gap in relative prices that does not started to fill up only recently. “The European stock market can decouple from lower earnings later in the year when inflation peaks and central banks stop raising rates,” said Citi strategist Beata Manthey.
However, not everyone is convinced of the longevity of European rallying. According to Frederic Dodard, head of portfolio management at State Street Global Advisors, the region benefited from lower risk aversion and a boost in luxury following recent reopening announcements in China. Still, the ‘value’ element wears off “and I don’t rule out a correction in the next few weeks”. Who will have had a fine nose? Answer in the next few months.