A trader monitors financial data at the Frankfurt Stock Exchange in Germany.
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Last year the US economy and markets struggled – and the year ahead promises to be tough as well. This has led some strategists to argue that 2023 could be Europe’s time to shine.
Zeynep Ozturk-Unlu, Deutsche Bank’s chief investment officer for EMEA, believes Europe is outperforming both economically and in capital markets, with fears of contraction and recession becoming “more accelerated” in the United States than in Europe.
And this despite the fact that Europe faces its own challenges, Ozturk-Unlu said, including the ongoing war in Ukraine, the energy crisis and inflation that has yet to peak – and it is unlikely to reach the European Central Bank’s 2% target before mid-2024 at the earliest.
“Europe has been in expansionary fiscal policy mode for quite a while, especially because of the energy crisis,” she told CNBC’s “Squawk Box Europe” on Monday. “But beyond that…Europe is also betting on reopening China and that’s going to give some tailwinds to the European growth story.”
European GDP growth last exceeded that of the United States in 2017, although final figures for 2022 have yet to be released.
Ozturk-Unlu pointed to the diversification of sectors in Europe compared to the United States and the sustainable growth of production, especially in Germany and France, as a case for the region having more stable economic growth.
Turning to equities, she continued: “This does not mean that Europe is completely immune and in great shape, but in relative terms, the shift from growth [stocks] the value actually gives a bit more opportunity to Europe compared to the United States”
So-called growth stocks – which include big US tech stocks – have been hit hard in 2022 as the US Federal Reserve raised interest rates, which affected future earnings expectations. Value stocks, by comparison, tend to outperform when rates rise, and Europe overall has a higher proportion of value stocks than its global peers.
Since the beginning of the year, Europe Stoxx 600 the index rose more than 5% against a 3.4% gain in the United States S&P500.
Despite their worst performance since 2018, European stocks also outperformed the United States last year, ending with a loss of 13% compared to 19.4% for the S&P.
“There is this opportunity coming from the significant undervaluation of Europe relative to the United States,” added Ozturk-Unlu. “That’s why we think the world outside of the US will outperform the US, and Europe in relative terms, in equities, will outperform.”
Brighter outlook, but risks remain
Deutsche Bank is not alone in having a more optimistic outlook for Europe.
Further Fed tightening, fiscal stimulus in the Eurozone, the reopening of China giving a boost to Europe in particular, and falling energy prices were all cited by strategists as reasons why the European economy could outperform in 2023.
And some early data points look positive for the Eurozone versus the US
Figures for the Composite Purchasing Managers Index – a closely watched measure of economic trends – fell to a 4-month low of 45 for the United States in December. In contrast, Eurozone figures hit a 5-month high of 49.3, a hair’s breadth from the expansion territory figure of 50.
Karsten Junius, chief economist at Swiss bank J. Safra Sarasin, expects flat GDP growth in the euro zone this year, compared to a contraction of 0.5% in the United States.
However, he does not expect this to translate into an outperformance of stock markets. One of the reasons for this is the recent appreciation of the eurowhich tends to weigh on revenue with a three-month lag, he told CNBC via email.
A number of strategists have argued that while markets were driven by monetary policy in 2022, they will be driven more by economic data and earnings in 2023.
Among them, Joost van Leenders, senior investment strategist at Van Lanschot Kempen. Unlike Junius, he was more cautious about Europe’s economic outperformance, but said equities could surprise on the upside.
“If there is a recession in Europe and the United States, there must be downgrades in terms of lower profits in all areas – the United States seems more advanced in this direction,” he said. told CNBC over the phone.
“But if the recession in Europe turns out to be very shallow, then because Europe’s discount to the United States is almost as deep as it’s ever been, that could be a trigger to unlock this valuation discount,” he added, until the Fed starts cutting rates, which boosts U.S.-based growth stocks.
Paul O’Connor, head of the multi-asset team at asset management firm Janus Henderson Investors, agreed there were “good reasons” to believe an era of US stock market outperformance had started a reversal that could stretch into 2023 and beyond.
“While the outperformance of US equities after the global financial crisis was supported by superior US earnings momentum, this influence was amplified by a relative valuation shift in favor of US equities. The two trends are now reversing. So that US stocks look expensive relative to bonds and their own history, stocks in most other markets look pretty valued,” he told CNBC.