Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 28/02/23
Euro area equities have outperformed their US peers by +14% over the past year
Key Takeaways
US equity markets have increased by +11% since October 2022 lows of 3577, albeit trading in a channel between 3900 and 4100 since December 2022, as market implied expectations have adjusted towards higher terminal interest rates and less easing after that, due to better-than-expected activity and inflation data.
US private consumption entered 2023 on a strong note, as personal spending, in constant price terms, was up by +1.1% mom (+2.4% yoy), following a decline of -0.3% mom in both December and November 2022. The Federal Reserve’s preferred gauge of inflation (PCE index) increased by +0.6% mom (+5.4% yoy) in January from +0.2% mom (+5.3% yoy) in December. The core PCE index increased by +0.6% mom (+4.7% yoy) from +0.4% mom (+4.6% yoy) in December and above expectations of +0.4% mom.
So far this month, the relative upward repricing vis-à-vis the terminal interest rate has been broadly identical at circa +50 basis points (FED vs ECB). However, the valuation cushion of SXXE has supported, inter alia, the overperformance of euro area equities by +430 basis points in February (SXXE: +2%, SPX: -2.3%). Note, that, euro area equities are still trading at a bigger valuation discount-than-typical against their US peers (-25% vs -14% on average).
Indeed, the SXXE 12-month forward Price-to-Earnings (P/E) ratio stands at 13.2 versus an average of 14.0x since 2000 (at the 45th percentile in that period). On the other hand, the 12-month forward Price-to-Earnings ratio stands at 17.6x versus an average of 16.3x since 2000 (at the 73rd percentile in that period). Compared with one year ago, euro area equities have overperformed by +1400 basis points year-over-year in local currency terms (SXXE: +7%, SPX: -7%) and by +900 basis points in EUR terms (EUR/USD was down by -5% to 1.06 in the same period).
Relative corporate earnings performance since June 2022 explains a substantial portion of the outperformance, albeit this recent outperformance is a drop in the ocean compared to the massive underperformance of euro area equities’ EPS (and price) growth rates since 2010. Looking forward, 2023 S&P500 EPS are now expected at $222 from a peak of $250 in June 2022 (-11%). On the other hand, 2023 SXXE EPS are expected at €33.6, broadly unchanged since June 2022.
Relative to fixed income, equities on both sides of the Atlantic appear less attractive, as risk premia are slim. The earnings yield -- the inverse of the Price-to-Earnings ratio -- minus the yield of long-term government bonds, adjusted for inflation, has declined significantly, particularly in the US.
Tactically, nominal long-term government bonds are not out of the woods yet, as markets price in further policy interest rate hikes following persistent inflation data and hawkish central bank commentary, while the ECB is expected to initiate the reduction of asset repurchases in March. Cash-like products appear attractive, with the 3-month BUBILL at 2.6% -- a 15-year high. Strategically though, prospects have brightened for long-term fixed income investors, as expected returns for high quality bonds have not been as high for more than a decade.
Key Takeaways
US equity markets have increased by +11% since October 2022 lows of 3577, albeit trading in a channel between 3900 and 4100 since December 2022, as market implied expectations have adjusted towards higher terminal interest rates and less easing after that, due to better-than-expected activity and inflation data.
US private consumption entered 2023 on a strong note, as personal spending, in constant price terms, was up by +1.1% mom (+2.4% yoy), following a decline of -0.3% mom in both December and November 2022. The Federal Reserve’s preferred gauge of inflation (PCE index) increased by +0.6% mom (+5.4% yoy) in January from +0.2% mom (+5.3% yoy) in December. The core PCE index increased by +0.6% mom (+4.7% yoy) from +0.4% mom (+4.6% yoy) in December and above expectations of +0.4% mom.
So far this month, the relative upward repricing vis-à-vis the terminal interest rate has been broadly identical at circa +50 basis points (FED vs ECB). However, the valuation cushion of SXXE has supported, inter alia, the overperformance of euro area equities by +430 basis points in February (SXXE: +2%, SPX: -2.3%). Note, that, euro area equities are still trading at a bigger valuation discount-than-typical against their US peers (-25% vs -14% on average).
Indeed, the SXXE 12-month forward Price-to-Earnings (P/E) ratio stands at 13.2 versus an average of 14.0x since 2000 (at the 45th percentile in that period). On the other hand, the 12-month forward Price-to-Earnings ratio stands at 17.6x versus an average of 16.3x since 2000 (at the 73rd percentile in that period). Compared with one year ago, euro area equities have overperformed by +1400 basis points year-over-year in local currency terms (SXXE: +7%, SPX: -7%) and by +900 basis points in EUR terms (EUR/USD was down by -5% to 1.06 in the same period).
Relative corporate earnings performance since June 2022 explains a substantial portion of the outperformance, albeit this recent outperformance is a drop in the ocean compared to the massive underperformance of euro area equities’ EPS (and price) growth rates since 2010. Looking forward, 2023 S&P500 EPS are now expected at $222 from a peak of $250 in June 2022 (-11%). On the other hand, 2023 SXXE EPS are expected at €33.6, broadly unchanged since June 2022.
Relative to fixed income, equities on both sides of the Atlantic appear less attractive, as risk premia are slim. The earnings yield -- the inverse of the Price-to-Earnings ratio -- minus the yield of long-term government bonds, adjusted for inflation, has declined significantly, particularly in the US.
Tactically, nominal long-term government bonds are not out of the woods yet, as markets price in further policy interest rate hikes following persistent inflation data and hawkish central bank commentary, while the ECB is expected to initiate the reduction of asset repurchases in March. Cash-like products appear attractive, with the 3-month BUBILL at 2.6% -- a 15-year high. Strategically though, prospects have brightened for long-term fixed income investors, as expected returns for high quality bonds have not been as high for more than a decade.