A trader monitors financial data on the Frankfurt Stock Exchange in Germany.
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The U.S. economy and markets have had a rough ride in the past year — and the year ahead looks just as tough. This has led some strategists to argue that 2023 could be Europe’s time to shine.
Zeynep Öztürk-Ünlü, Deutsche Bank’s chief investment officer for EMEA, sees Europe performing better in both economic and capital markets, with contraction and recession fears “accelerating” in the US than in Europe.
While Europe faces its own challenges, including the ongoing war in Ukraine, the energy crisis and inflation that has not yet peaked, it may not reach the European Central Bank’s 2% target until mid-2024, Öztürk-Ünlü said. the earliest.
“Europe has been in an expansionary fiscal policy mode for a long time, especially because of the energy crisis,” he told CNBC’s “Squawk Box Europe” on Monday. “But apart from that… Europe is also betting on the reopening of China, which will provide positive tailwinds to the European growth story.”
European GDP growth last surpassed the US in 2017, although final figures for 2022 have not yet been released.
Öztürk-Unlü emphasized that the region has a more stable economic growth compared to the United States due to the diversification of sectors and continuous production growth, especially Germany and France.
As for stocks, he continued: “This is not to say that Europe is completely unscathed and in great shape, but in relative terms the transition from growth [stocks] giving value actually gives Europe a bit more leverage than the US.”
So-called growth stocks have been hit hard in 2022, including big U.S. tech stocks, as the U.S. Federal Reserve raised interest rates, hitting future earnings expectations. In comparison, value stocks tend to outperform as prices rise, and Europe has more value stocks than its global peers.
Europe so far Stoxx 600 the index rose more than 5%, compared to a 3.4% increase in the US S&P 500.
Despite its worst performance since 2018, European stocks also outperformed the U.S. last year, ending with a 13% loss compared to 19.4% for the S&P.
Öztürk-Ünlü added that “there is this opportunity due to the significant undervaluation of Europe compared to the United States.” “That’s why we think the world outside the US will outperform the US and Europe relative to equities.”
A brighter outlook, but risks remain
Deutsche Bank is not alone in its more optimistic outlook for Europe.
Further tightening by the Fed, fiscal stimulus in the eurozone, the reopening of China, which has boosted Europe in particular, and falling energy prices have been cited by strategists as reasons why the European economy could outperform in 2023.
Some early data points look positive for the eurozone compared to the US
Purchasing managers’ index numbers, a closely watched measure of economic trends, fell to 45 for the US in December. In contrast, the Eurozone reading rose to a 5-month high of 49.3, a hair’s breadth from the expansion area figure of 50.
Karsten Junius, chief economist at Swiss bank J. Safra Sarasin, expects stable GDP growth in the euro zone this year, compared to a 0.5% decline in the United States.
However, he does not expect this to translate into higher performance in equity markets. One of the reasons for this is the recent increase in prices eurowith a three-month lag tends to weigh on earnings, he told CNBC via email.
A number of strategists have argued that while markets will be driven by monetary policy in 2022, 2023 will be driven more by economic data and earnings.
Among them is Joost van Leenders, chief investment strategist at Van Lanschot Kempen. Unlike Junius, he was more cautious on Europe’s economic outlook, but said stocks could surprise to the upside.
“If there’s a recession in Europe and the U.S., downgrades are needed in terms of weaker earnings across the board — the U.S. looks more advanced in that sense,” he told CNBC by phone.
“But if the recession in Europe is very shallow, it could be a trigger to unlock that valuation discount, as Europe’s discount to the US is almost as wide as before,” he said. The Fed does not begin to cut interest rates, thereby increasing the growth reserves in the United States.
Paul O’Connor, head of the multi-asset group at asset management firm Janus Henderson Investors, agreed that there are “good reasons” to believe that the US stock market’s period of outperformance has begun a turnaround that could extend into 2023 and beyond.
“While the outperformance of US stocks since the Global Financial Crisis has been supported by high US earnings growth, this effect has been exacerbated by a relative valuation shift in favor of US stocks. Both trends are now reversing. US stocks look expensive relative to bonds and themselves. Historically , in most other markets the stock looks pretty valuable,” he told CNBC.