No other asset globally is as hated as European equities. But, according to investment strategists, the region’s stocks have one big advantage that could attract U.S. investors.
Over the next 12 months, U.S. stocks will lose the major support they get from buybacks as a deterioration in the quality of corporate debt and slowing economic growth put an end to a share-repurchase bonanza that reached $1 trillion in 2018, according to Bernstein. That’s where unloved European stocks enter the picture, with their low dependence on buybacks.
While the U.S. Federal Reserve’s decision to halt rate increases may have reduced market concerns about lower-quality debt hurting equities, analysts say the topic isn’t off the table and expect credit spreads to keep widening over the next 12 months.
The significance of corporate share repurchases to the U.S. stock rally is pronounced, with the trillion-dollar companies plowed into their own shares in 2018 overshadowing the $100 billion net flow from all active and passive funds.
Despite enjoying a formidable rally that has added more than $1.5 trillion U.S. in value to European equities since their December lows, shorting the asset remains the most popular trade globally, according to a recent latest fund manager survey. Many traders remain on the sidelines as messy politics, mixed economic data and unenthusiastic earnings outlooks weigh on sentiment.
European stock funds have been hemorrhaging almost non-stop for a year now, with outflows since the Brexit referendum reaching $139 billion U.S.. What’s scaring Bernstein strategists is that redemptions have been so large that they’ve erased the inflows fueled by Mario Draghi’s 2012 pledge to do "whatever it takes" to preserve the euro.
Even so, low investor positioning, discounted valuations and anticipated support from reduced U.S. buybacks still aren’t enough to trigger a buy call for European equities from analysts.
