Traffic passes along the Champs Elysee avenue near the Arc de Triomph in Paris, France, on Friday, March 19, 2021. French President Emmanuel Macron is locking down several regions including the Paris area, slowing down the countrys economic recovery as it struggles to contain a third wave of the coronavirus epidemic. Photographer: Cyril Marcilhacy/Bloomberg via Getty Images
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LONDON — European stocks hit a fresh record high on Thursday, and analysts are confident there is further upside as prices remain low compared to the U.S.
The pan-European Stoxx 600 hit a high of 438.29 on Thursday, surpassing levels seen in late February 2020, just before the region’s stocks sold off as the coronavirus pandemic hit its nations hard. Thursday’s move marks a more-than 55% jump from a pandemic low seen on March 18, 2020.
“The coming two years should be kind to euro area stocks,” analysts at BCA research said in a note on Monday. They said this was partly because of expectations that borrowing costs will rise globally, making certain equities, such as financial stocks and beaten-down sectors, more attractive than bonds.
“Moreover, European equities are exceptionally cheap, which accentuates their appeal as a yield play,” BCA analysts said.
J.P. Morgan analysts also said on Monday they see a 3% upside on Europe’s Stoxx 600 this year. In late March, analysts at Bank of America went even further, estimating a 7% jump for the largest European index by the end of the summer.
“European equities are set to benefit from a sharp acceleration in euro area GDP (gross domestic product) growth over the coming months, but that is due to the boost from reopening and the support from a powerful U.S. recovery, rather than a function of the dispersal of NGEU funds,” two analysts at Bank of America said in a note at the time.
The EU agreed last year to raise 750 billion euros ($897 billion) from public markets in so-called Next Generation EU funds. The money, however, is unlikely to be disbursed before the summer months.
Roger Jones, head of equities at London and Capital, wasn’t quite as bullish, however.
“Although we have seen a price recovery in the index, there is still a way to go to get an earnings recovery,” he told CNBC Thursday morning. “This is expected to materialize next year when market earnings estimates are forecast to be above 2019 levels,” he said, but warned: “If this doesn’t happen then I think the index price level recovery may come under pressure.”
European companies are expected to do better in the coming months, with Goldman Sachs analysts forecasting 40% earnings-per-share growth in Europe this year.
Corporates are seen benefiting as the economy recovers, the region’s long-awaited fiscal plan in is rolled out and its vaccination campaign is stepped up. Last month,
In a note Monday, Goldman analysts said the euro area was expected to “rebound sharply” into the summer. “Europe remains at a sharp discount to the U.S. market,” the analysts, led by Sharon Bell, said in the note.
U.S. equities surpassed their February 2020 levels in November — five months ahead of Europe — and have kept edging higher since.
This broad move upwards in the United States came after Joe Biden won the presidential election and the positive sentiment was further boosted by his $1.9 trillion fiscal stimulus plan, which is already being deployed across the country. As a result, the S&P 500 is currently trading more than 20% higher than the levels seen in November.
The recovery in Europe has been held back by a vaccine rollout that has lagged other parts of the world and a third wave of infections that has led to renewed lockdowns in a number of countries.
“The U.S. is getting a boost from a fiscal stimulus that may well be excessive whereas continental Europe is held back by slow vaccination progress,” Holger Schmieding, chief European economist at Berenberg, said about the differing market moves.
“But the vaccination rollout in Europe is not picking up pace and the euro zone economy will also start to perk up soon, probably in May. European markets thus do have catch-up potential.”
The International Monetary Fund said on Wednesday that European economies were likely to return to their pre-crisis levels in 2022. The Fund expects the continent to grow at a rate of 3.9% next year, but this outlook is reliant on a successful vaccine rollout.
“There’s an unknown on how quickly the third wave can be defeated, that we don’t have in the forecast and that is certainly a downside risk,” Alfred Kammer, director of the IMF’s European department, told CNBC’s Joumanna Bercetche.
“A downside risk is also if the vaccination would be slower than we all currently expect,” he said, adding: “We need to be ready that the virus is going to surprise us again.”
The European Commission plans to have 70% of the adult population in EU nations vaccinated by summer, but this forecast will also depend on whether the manufacturers of the shots meet delivery expectations.
AstraZeneca has been delivering far fewer doses than what EU nations had hoped and, earlier this week, Johnson & Johnson said the rollout of its Covid-19 vaccine in Europe would be delayed after medical authorities in the U.S. raised concerns over potential side effects. The J&J shot was particularly sought-after by many governments in Europe given that it only requires one inoculation.