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May 13, 2024 - Europe could continue to perform better than the US.

(Please not that there will be no weekly next week, due to a public holiday).

European equities rallied more than 3% for the week, with the Euro Stoxx50 reaching a new record high, close to the level accomplished at the end of March. But this time, even the Swiss market posted strong gains (+4.2%) and with one less trading day due to a public holiday. The characteristic of the week was a mini rotation to this year's laggards which happen to be found primarily in the defensive sectors such as Food & Beverages, Pharmaceuticals and Utilities. Those sectors outperformed the rest of the market. The US indices rose by less than 2%, as Nasdaq (+1.1%) and Technology underperformed. The Hang Seng index rose by a further 3.5% to the highest level in almost one year.

We have to note that Europe and in particular Eurozone equities have performed better than their US peers this year but also since the start of the rally in October 2022. And this outperformance has taken place despite everybody's attention on the big US Technology related companies that dominate the world and the news. Europe does not have mega Tech companies to boast about (with the exception of ASML, the semiconductor equipment maker), but has its own gems in Industrials (ABB, Schneider, Airbus), Consumer Goods (L'Oréal, LVMH, Richemont), Materials (Linde) and Healthcare (Novo Nordisk) whose valuations have improved immensely during the last two years. More and more US investors are discovering Europe now that Technology valuations in the US appear to be if not expensive, definitely lacking large upside in the medium term.

There are quite a few reasons to believe that European equities can continue performing well, relative to the US. Firstly, the recent data show that Europe's macro indicators are improving (PMI, GDP, sentiment indicators), albeit from low levels, at the same as the US economic data have started to show some weakness (admittedly from much higher levels than Europe). The record GDP gap between the two regions should soon close. Then, the ECB’s path to easing is much clearer than the Fed’s. Lest we forget, the Swiss National Bank has already cut rates and in June the ECB and BoE are expected to follow. On valuations grounds, the sector adjusted P/E is at 18% below the US and has only been at similar or lower levels when there is a recession or during the Eurozone crisis. The ERP (equity risk premium) in Europe is 2% higher than the US, a difference which is close to the record high. As a note, the higher the ERP is, the more attractive an equity market in terms of valuation.

The week's macro data brought some further confirmation of a slowdown in the US. The weekly initial jobless claims jumped to 230k, which is the highest number since October of last year. This comes one week after the other labor data (non-farm payrolls, unemployment) which also showed deterioration in the jobs market relative to previous months, although in absolute numbers the data are still good. Furthermore, US banks continued to indicate that credit demand from households remains weak, according to the Federal Reserve's latest Senior Loan Officer Opinion Survey (SLOOS) which was released last week. In addition, the share of small businesses reporting in the NFIB survey that credit is harder to get increased through the first quarter at 8%. To put this number into context, this share averaged 4% between 2014 and 2019.

The Bank of England left rates unchanged at 5.25%, as widely expected. The decision was supported by seven MPC members, while two members voted for a 25bp rate cut. The main, dovish change came from the Committee's forward guidance, which essentially opened the door for a rate cut as soon as the next meeting in June. Specifically, the MPC said it “will keep under review for how long Bank Rate should be maintained at its current level” that it will do so on the basis of forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding".

China continued to surprise positively. Its exports and primarily its imports for the month of April showed better growth than expected, while the Services PMI was announced better than expectations (52.5 vs 52.3). News about the Chinese government planning to abolish the dividend tax paid for Hong Kong listed companies to avoid double taxation helped further sentiment for the region.

The Chinese President's European visit for the first time in five years also drew attention. Headlines were made when President Macron mentioned that the Chinese government might not eventually impose tariffs on cognac imports from France, at the same time that reports from the US are talking about fresh tariffs on Chinese electric cars to be imposed by the Biden administration.

Bonds had a volatile week and finished slightly lower (yields higher). The weak US macro data and the successful Treasury auctions brought buyers into the market, but selling pressure re-emerged towards the end of the week. The April inflation numbers out in the US this week is making the market nervous. The US 10-year is current trading at 4.50% and the German equivalent ant 2.50%.

Chart of the Week : US equities' relative valuation is falling from extreme levels.

The above chart shows the relative valuation of the US market (S&P500) compared to global equities (MSCI World), in term of the price-to-earnings ratio (P/E). As can be seen, the US equities have enjoyed a premium valuation that has only kept rising higher since 2016 and the temporary, big corporate tax cuts of the Trump administration (which are coming due next year). The pandemic and the Tech innovation of the 2020s brought this premium to extreme levels in 2021, more than 1 standard deviation above the average. The correction which followed in 2022 made this premium shrink but the 2023 rally brought it back to extreme levels. It has been correcting since then, as Europe has outperformed the US for more than a year now. It is very hard to predict whether the US supremacy of the past decade will continue in the next ten years. What we should not forget is that there have been long periods in time when the US and Europe were trading at similar valuations (2005-2015) or with slight US premium and maybe these times arrive again.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : UBS, Photo:: Forbes/getty


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