By one measure, European stocks have never been so popular.
Investors bought $6 billion worth of European stocks and ETFs last week, the most ever for a single week according to Bank of America Merrill Lynch. All the buying didn’t move the needle much for European markets as a whole—the Stoxx Europe 600 index barely budged last week—but the record influx shows that there’s a global appetite for European stocks right now.
The question is, Why? The answer appears to be three-fold.
Here are the three primary reasons why investors are suddenly turning their attention to European stocks.
[text_ad]
The French Election
Investors around the world breathed a sigh of relief when moderate, centrist candidate Emmanuel Macron defeated far-right candidate Marine Le Pen in the French presidential election earlier this month. Macron’s win was viewed as a stabilizing force for the European economy following the Brexit vote. Until recently, European markets had been volatile amid all the uncertainty. The Stoxx Europe was up and down for the last six months of 2016 in the wake of British voters’ seismic decision to exit the European Union. This year, however, European stocks have performed well, up more than 9% year to date, outpacing the 7.3% return in the S&P 500.
Macron’s victory had a further calming effect on European markets, emboldening investors around the world to pour more money into European stocks.
Earnings Growth Accelerates
Like in the U.S., profits at European companies have improved in recent quarters. For the year, companies in the Stoxx Europe 600 are expected to grow earnings by 14%. This comes on the heels of a fourth quarter in which earnings growth among Europe’s largest companies (11%) outpaced the S&P 500 (5%) for the first time in a year and a half. Part of that is due to how poorly some European companies, namely the banks, had performed in the past couple of years, thus setting the bar low for improvements. A weaker euro also helped.
Regardless of how it happened, the rebound in European earnings has reinvigorated interest in investing in Europe. If European companies meet or exceed their lofty expectations for growth this year, it should further whet investors’ appetite for European stocks.
Erratic Trump
As uncertain and volatile as the early days of Donald Trump’s presidency have been, the U.S. stock market has been anything but volatile. The VIX (a measure of stock volatility, or investor fear) is just coming off its lowest point in decades. U.S. stocks continue to inch higher, with the S&P, Dow and Nasdaq all poking their heads above new record highs in early Monday trading. But as our market expert Mike Cintolo wrote last month, money flows into U.S. stocks have been trending downward since the election, and were nearing a three-year low in mid-April. Since then, Trump has fired the head of the FBI and said he’d be “honored” to meet with North Korean dictator Kim Jong Un.
So, it stands to reason that while U.S. stocks are holding up well, the decrease in participation in the U.S. stock market and the record inflow into European stocks last week is a product of investors having more confidence in the future of European markets than America’s.
European Stocks a Good Momentum Buy?
It certainly doesn’t mean you should turn your back on U.S. investment opportunities—not with U.S. markets showing basically zero signs of a slowdown. But it does mean that if you’re looking for international investing opportunities, Europe may be a good place to find them right now.
(Note: Mike Cintolo recommended a European stock that’s up more than 21% year to date in his Cabot Top Ten Trader growth investing advisory this week. To find out what it is,click here.)
[author_ad]
