UBS Strategists Favor European Stocks Over US, Citing Economic Data and Valuations

UBS strategists favor European stocks over US stocks, citing closing economic growth gap and easing monetary policy. European stocks' relative earnings momentum, valuations, and sector diversity support this investment strategy shift.

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UBS Strategists Favor European Stocks Over US, Citing Economic Data and Valuations

UBS Strategists Favor European Stocks Over US, Citing Economic Data and Valuations

In a recent note, UBS strategists have made a "U-turn" in their investment strategy, now favoring European stocks over us. According to their regional scorecard, European stocks excluding the UK outrank the US, with Japan ranking first, the UK second, and Europe third.

Why this matters: This shift in strategy could have significant implications for global investors, as it may signal a broader trend of investors seeking opportunities outside of the US market. As economic conditions continue to evolve, this could lead to a rebalancing of portfolios and a potential shift in market dynamics.

Several key factors are influencing this shift in strategy. UBS forecasts that the gap between US and European economic growth will soon close, with indicators such as purchasing managers' index (PMI) data suggesting an upside risk to European GDP and a downside risk to US GDP. Monetary policy is also a key area to watch, with some European central banks already easing and the European Central Bank expected to do so as soon as June. Inflation is easing more steadily in Europe than in the US, making the path to lower rates clearer.

Relative earnings momentum is moving in Europe's favor, with a weaker euro and stronger PMIs expected to boost earnings revisions. European profit margins are also less extended than those in the US. Valuations are another important consideration, with Europe's equity risk premium (ERP) 2.1 percentage points above the US, close to a record high. The sector-adjusted P/E in Europe is 18% below the US, a level only seen during recessions or Eurozone crises.

The UBS strategists note, "The ERP in Europe is 2.1pp above the US, close to a record high. The sector adjusted P/E at 18% below the US has only been at similar or lower levels when there is a recession/Eurozone crisis. We have neither." They also highlight that around 40% of Europe's market cap is made up of companies that are industry-leading or unique, with no direct US-based competitors.

Key statistics support the case for European stocks. UBS projects US GDP growth of 1.6% for Q1 2024, while Eurozone GDP is forecast at 0.3%. Excess savings are higher in Europe than in the US, and bank lending conditions for companies are looser in Europe. With these factors in mind, UBS strategists see a compelling opportunity in European equities as economic conditions evolve.

Key Takeaways

  • UBS strategists favor European stocks over US stocks due to changing economic conditions.
  • European stocks outrank US stocks in UBS' regional scorecard, with Japan ranking first.
  • Economic growth gap between US and Europe is expected to close, with Europe's GDP growth forecast at 0.3%.
  • European earnings momentum is improving, with weaker euro and stronger PMIs boosting earnings revisions.
  • European equity risk premium is 2.1% above the US, making European stocks a more attractive option.