Europe remains a tradable rally that has basis in fundamentals and momentum.
Despite underperforming the SPX last week ( -135bps on 5d% move on The Euro Stoxx 50 benchmark, STXE50, vs the SPX) and by -270bps MTD, European equities are still 450 bps better over the last one month and 710bps over the last three months.
Now understanding that each index is priced in its local currency terms (Dollars vs Euros) you can see that this is misleading if you are a U.S. investor in European equities.
If you own Europe you have FX exposure and the 3 month move in the Euro means you lost 830bps on the currency against your 710 bps gain, thus you’re down, -120bps.
But first lets address the European rally and why it’s happening:
- Oil is a major relief and more QE for the continent who has been under pressure for years from higher oil prices and Russia’s pinching them on gas imports. EU benefits more than the US from lower oil prices
- The Euro is a major tailwind to exporting countries like Germany and even Italy.
- There are 14.5Trn Euros of negative yielding government debt forcing people into equities
- Overall market positioning is 50% of where it was positioned a year ago towards European equities. Last 3 weeks Europe has become the market darling of fund flows seeing over $15Bn in allocations. There is more to go
Looking in Euro terms of the Stoxx50 vs the SPX you can see that there is still a significant underperformance to Europe which only began to reverse when the Euro stopped dropping in the middle part of January.
We believe European equities can rally to 0.52 on the chart, or another 500bps (5%) vs the SPX into mid-April before we expect seasonal risk patterns to emerge. A deal with Greece may jump start that move after last week’s pullback. Note that the SPX got more bang from the Greece news last week as it was seen as a relief rally for an underperforming index. We expect that will reverse.
Europe offers value on valuation (approx. 16.4X P/E vs 19.2X P/E) and has earnings momentum that will be funneling through company updates in the next 6 weeks.
Stay long the spread and stop yourself at 0.44 which was the lows of January.Trading Europe: We Remain Long