For the most part, the past three months have been the near-exact opposite of the previous year in financial markets. Technology has been strong, while commodities have been weak; bonds have improved, and ‘value’ sectors have been weak. This is largely a function of the ebb and flow of interest rate expectations. The notable exception has been Europe, which does not fit the pattern. 


The average Europe ex UK fund is up 11.2% for the year to date. That puts it well ahead of the North America sector (3.6%), the UK All Companies sector (5.8%) and the Japan sector (3.4%). Its success does not conform to the various market trends. European markets, with their high weighting in banks and staples, tend to be more ‘value’ than growth. Neither did Europe perform particularly badly in 2022. 

Certainly, Europe’s stronger performance can be explained by a ‘relief’ rally. There had been fears that Europe would experience an energy crisis, halting manufacturing production and stalling the economy. A warm winter and swift action from policymakers meant a crisis did not materialise. There are still fears over next winter, but for the time being, that is eight months away and a lot could change by then. 


This has had a knock-on effect on consumer and business confidence. Earnings from European companies have been stronger than their US counterparts, particularly the region’s flagship luxury goods companies that are benefiting from the reopening of China. LVMH, for example, Europe’s most valuable listed company, reported a 17% rise in first-quarter sales, more than double analysts’ expectations. 


Europe may also be benefiting from fund flows out of the US as the Dollar weakens. The Euro hit parity with the Dollar at various points in 2022 but has been strengthening since October. It is now about 10% off its lows and appears to be building momentum. 


But perhaps the most important reason for Europe’s recent strength is that investors are finally starting to realise that the US may not be the trade it once was. While the global technology giants ruled the roost, there was no need for investors to hunt in the more complex European markets. However, as their halo has cracked, asset allocators have started to look elsewhere. 


Can this continue? For the time being European companies have earnings growth on their side. Profits margins have also looked more stable. With most investors finally recognising that they have neglected the world outside the US, Europe could continue its strength. 




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