The United States is significantly underperforming in global markets

A trader works on the trading floor of the New York Stock Exchange (NYSE), January 5, 2023.

Andrew Kelly | Reuters

US stocks have fallen a lot from their global counterparts during the past three months, which is rare in recent years, and analysts expect this difference to widen over the course of 2023.

As of Tuesday morning, the all-US stock market benchmark Russell 3000 index was up just over 6% in the three-month period since Oct. 24, while the S&P 500 was up 4.62%.

On the contrary, the MSCI World Index outside the United States It has increased by almost 20%, while pan-European Stokes 600 was more than 12%.

Weak US retail sales and industrial production figures last week reinforced the view that the US economy is slowing down, while the growth picture in Europe, Asia and various emerging markets has improved significantly.

In a research note on Friday, European equity strategists at Barclays highlighted that momentum for activity in Europe and the US is decoupling, which is “unusual” with positive data surprises in Europe such as a rebound in the PMI (Purchasing Managers’ Index) and the ZEW Economic Sentiment %s reading.

Unseasonably warm weather in northern Europe and a faster-than-expected Covid-19 reopening in China provided relief to the European outlook, even if many economists were still forecasting a mild recession.

Meanwhile, the opposite is unfolding in the US, where data is pointing to a sharper slowdown but inflation is also showing signs of a sustained downtrend, leading markets to hope an end to the Fed’s aggressive rate hike cycle.

Expect more divergence between European and US assets, says the strategist

“In the past two months or so, early signs of inflation and declining growth have been welcomed by stocks and bonds, bolstering the narrative of peak rates, but the mantra of ‘bad data is good news for stocks’ seems to be over now in the US,” Barclays strategists said.

“The rally is losing steam in stocks, while it is picking up pace in bonds. This is starting to look like the classic recession playbook, where investors sell stocks to buy bonds.”

By contrast, Europe appears to be in a “sweet spot” now, the Bank of England believes, as hopes of de-inflation lower yields and economic sentiment gets a boost from lower energy prices and China’s reopening, sending stocks higher.

We started the year [overweight] “Europe versus the US and I think the former offers better value, the potential to see reallocated flows towards the region and arguably more positive growth risks, at least in the short term,” said Emmanuel Cao, Head of European Equity Strategy at Barclays.

“However, if the overall situation in the US were to deteriorate further, history suggests that the decoupling of the two markets may not last long.”

Stephen Isaacs, chairman of the investment committee at Alvine Capital, told CNBC on Monday that a key factor in Europe’s comeback versus the United States is the waning fear that energy prices will remain high, or possibly get out of control.

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This was evidenced by the recent portfolio flows data released by French bank BNP Paribas, which showed that with lower gas prices, foreign investors returned to eurozone stocks in October and November for the first time since February 2022.

Isaacs also noted that although the talk about high interest rates usually focuses on the negative effects of economic growth, they also mean that savers generate income.

“Where do we find the most savers in broad terms? Places like Germany and Northern Europe, so I think those again are some of the small factors that people have forgotten,” he said.

“Tourism is, again, a big plus for Europe, and then finally the fact that European assets are undervalued and owned for some time.”

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Although the performance gap between Europe and the US has grown significantly in recent years, Isaacs suggested that the US market should be geared toward large-cap growth stocks and technologies compared to the makeup of many European markets – which are heavier weighted in consumer staples, financial institutions, And another valuable stock – means the tide is turning.

He added, “I think that in Europe, areas like financial services, European banks are still trading at deep discounts to book value, so there are some clear discounts and clear value there.”

While market bets are mounting for the Fed to end its tightening cycle soon, and may even start cutting interest rates by the end of the year in the face of slowing growth and low inflation, the ECB is expected to remain hawkish, with the bank guiding a final rate of 3.5-4%. .

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