European equities to perform well as the year progresses
By Olgerd Eichler, Portfolio Manager at Mainfirst
Valuations remain very attractive compared to global markets and especially the US market.
After a weak start to the year, the European stock markets had a positive first half of the year. The broad European equity market rose by over 12.11% reaching new all-time highs.¹ Large caps were the main drivers of this rise, gaining 12,72%.² Small³ and mid-caps⁴ performed less well, but still recorded a respectable gain of about 8%. They thus underperformed the broad equity market, indicating a relative risk aversion on the part of investors.
European inflation remained well above the 2% target despite the economic downturn. However, there was anticipation that the central banks would adjust interest rates in the near future, which gave the markets a positive boost.
Looking ahead
Europe’s currently more moderate economy and falling energy prices should ultimately favour further interest rate cuts by the ECB in the second half of 2024 and beyond, which could lead to an even more pronounced interest rate differential with the US if the Fed does not follow suit. This could be very positive for European equities. Not only do lower interest rates mean that companies can channel savings from lower interest costs into share buybacks, dividends and M&A, but a weak euro also boosts exports.
A look at the European equity markets is certainly worthwhile, as valuations remain very attractive compared to global markets and especially the US market. At the end of August, for example, the S&P 500 was trading at a P/E ratio of 23.4 while its European counterpart, the MSCI EUROPE NET TOTAL RETURN INDEX, was valued more than 33% cheaper at a P/E ratio of 14.8.⁵
Looking across the ocean, political uncertainty remains in the second half of the year. A new US president will be elected in November, which could lead to volatility. Historically, markets tend to bounce back from political shocks once uncertainty subsides and the focus returns to economic fundamentals. Despite the political uncertainty and economic challenges, European equity markets have shown remarkable resilience and growth potential in the first half of the year. The positive trend in inflation rates, the ECB's increasingly proactive monetary policy and the attractive valuation of European equities are strong indicators that the market will continue to perform well as the year progresses.
¹ MSCI Europe Net Total Return Index: 12.11% for the period from 31st December 2023 to 30. August 2024
² MSCI Europe Large Cap Net Total Return Index: 12.72% for the period from 31st December 2023 to 30th August 2024
³ MSCI Europe Small Cap Net Total Return Index 9.12% for the period from 31st December 2023 to 30th August 2024
⁴ MSCI Europe MID Cap Net Total Return Index: 9.16% over the period from 31st December 2023 to 30th August 2024
⁵ Source: Bloomberg, 30th August 2024, P/E ratio refers to estimated future earnings for next year
