European stocks look poised to make up ground on Wall Street in the second half of 2020 as Joe Biden consolidates his lead over Donald Trump ahead of the November U.S. presidential election and a surge of new COVID-19 cases threatens the U.S. economic recovery.
The U.S. stock market has consistently outperformed Europe since the 2016 election of Mr. Trump, which was followed by a rally widely dubbed the “Trump bump.”
Fund flows suggest a shift in sentiment. Bank of America’s latest weekly report on Friday showed US$6.6-billion left U.S. equity funds, the largest exodus in seven weeks, while US$800-million made their way into European ones.
The pan-European STOXX 600 has outperformed world stocks by about 1.5 per cent in the past month, while Wall Street’s S&P 500 has underperformed by the same extent.
Among factors boosting European assets is Europe’s relative success in gradually reopening its economy and the European Union’s proposed €750-billion (US$841.5-billion) recovery fund to help countries deal with the fallout from the coronavirus crisis.
The spending plan, which could be approved in July, would bring the EU closer to a fiscal union and as such has boosted sentiment and soothed recurrent worries about peripheral euro zone countries such as Italy.
The common currency has risen 4 per cent since France and Germany unveiled a joint proposal for the recovery fund on May 18.
“The strengthening of the euro reinforces the appeal of European equities, particularly for U.S. investors”, said Emmanuel Cau, head of European equity strategy at Barclays. “There’s a very strong rerating potential for the European market, which has long been underinvested and undervalued.”
Before the COVID-19 financial crash, the S&P 500 had gained more than 60 per cent since November, 2016, about twice as much as the pan-European STOXX 600.
“We are warming up to European assets as the region steps up its policy response and demonstrates relative success in tamping virus growth,” BlackRock Inc., the world’s biggest asset manager, told its clients last Monday.
Similarly, Goldman Sachs Group Inc. upgraded its rating for Europe to “overweight” for the next three months, citing “a combination of favourable tailwinds.”
Investors were pleasantly surprised last week when IHS Markit’s euro zone Flash Composite Purchasing Managers’ Index, seen as a good gauge of economic health, reached 47.5, moving closer to the 50 mark separating growth from contraction.
Meanwhile, the U.S. news flow was less favourable, with record COVID-19 infections and jobs data suggesting the labour market could take years to recover.
Opinion polls give Mr. Biden a substantial lead over Mr. Trump both nationally and in key U.S. states, and betting odds currently give the Democrat candidate a 60-per-cent chance of winning.
Goldman Sachs said the possibility of a Biden victory – and the possible reversal of Mr. Trump’s 2017 tax cuts – wasn’t fully priced into markets.
Given the uncertainty of the race and bearing in mind the surprise win of Mr. Trump over Hillary Clinton in 2016, many may choose to stay on the sidelines and wait for the dust to settle.
“European equities may get an edge over their U.S. peers as we get closer to the U.S. election,” said Andrew Sheets, Morgan Stanley’s head of cross-asset strategy.
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