The European Central Bank is expected to take a knife to its key
interest
rate next week, trimming it to 4.25% from the current 4.5%, which should be good for
stocks
across the bloc.
In fact, it seems like they’re already on a winning streak: European companies posted first-quarter profits roughly 8% ahead of consensus, with 20% of firms beating analyst targets. And that was across a range of sectors, with financials, manufacturing and materials, pharmaceuticals, semiconductors, and utilities all performing well. The showing has left analysts scrambling to make upward revisions to their earnings forecasts for the current quarter.
Business sentiment surveys have also become rosier this year, and inflows into European stocks have recently begun catching up, with a surge in just the past few weeks. But that inflow of money has still mostly lagged in the improvement in sentiment, both in size and speed.
Six-month Europe stock mutual fund flows, in billions of dollars (dark blue, left-hand axis). The Sentix Economic Expectations Index (light blue, right-hand axis). Source: Goldman Sachs.
It’s not a complete surprise that Europe has some catching up to do with investor sentiment. In recent years, it’s been the least favored region for buy-and-hold funds for several well-documented reasons – the Ukraine war, the energy crisis, high
inflation
, high
interest
rates, and a run of lackluster growth. Cumulative inflows into the region have actually been close to zero since 2020 – the worst of any region.
But now, with the anticipated turnaround in Europe’s economy, there’s a pickup in buying into
stock
sectors that tend to do well when the economy is thriving and, according to Goldman Sachs, that’s coming from major investment funds – both at home and abroad.
With the Stoxx 600 market trading at a 13.5x forward price-to-earnings ratio and with a 3.4%
dividend
yield, Europe is trading cheaper than Japan, Asia, and, of course, the US. And that’s pretty attractive if you believe the bloc’s economy is set to recover, its inflation is under control, and its interest rates will soon start coming down. Just be aware that the euro could lose some of its strength as the ECB cuts interest rates, because the lower yields that result will be less attractive to international savers and investors, so if you’re looking to invest broadly – say, with a European stocks ETFs – a “hedged” version that softens the currency impact may be the better bet.