A trader monitors financial data at the Frankfurt Stock Exchange in Germany.
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Last year took the US economy and markets on a bumpy ride – and the year ahead looks tough too. That has led some strategists to argue that 2023 could be Europe’s time to shine.
Zeynep Ozturk-Unlu, Deutsche Bank̵[ads1]7;s chief investment officer for EMEA, sees an argument for Europe to outperform both economically and in capital markets, with contraction and recession fears being “more accelerated” in the US than in Europe.
This is despite Europe facing its own challenges, Ozturk-Unlu said, including the ongoing war in Ukraine, the energy crisis and inflation that has yet to peak – and is unlikely to hit the European Central Bank’s 2% target before mid-2024 at at the earliest.
“Europe has been in expansionary fiscal mode for quite some time, especially because of the energy crisis,” she told CNBC’s “Squawk Box Europe” on Monday. “But beyond that… Europe is also betting on the reopening of China, and that is going to provide a positive tailwind to the European growth story.”
European GDP growth last surpassed the US in 2017, although final figures for 2022 have not yet been released.
Ozturk-Unlu pointed to diversification of sectors in Europe compared to the US and sustainable manufacturing growth, especially in Germany and France, as an argument for the region’s more stable economic growth.
As for stocks, she continued: “It does not mean that Europe is completely immune and is in good shape, but in relative terms the shift from growth [stocks] to appreciate actually gives a little more opportunity to Europe compared to the US”
So-called growth stocks – which include the big US technology stocks – were hit hard in 2022, when the US central bank raised interest rates that hit expectations for future earnings. Value stocks, by comparison, tend to perform better as prices rise, and Europe generally has a higher proportion of value stocks than its global competitors.
So far this year is Europe’s Stoxx 600 the index has risen over 5% against an increase of 3.4% in the USA S&P 500.
Despite their worst performance since 2018, European stocks also outperformed the US last year, ending with a 13% loss compared to 19.4% for the S&P.
“This opportunity comes from the significant undervaluation of Europe compared to the US,” Ozturk-Unlu added. “That’s why we think the world outside the US will outperform the US, and Europe in relative terms, in equities, will outperform it.”
Brighter outlook, but the risk remains
Deutsche Bank is not alone in its more optimistic outlook for Europe.
Further Fed tightening, fiscal stimulus in the Eurozone, China’s reopening providing a boost to Europe in particular, and falling energy prices were all cited by strategists as reasons why Europe’s economy could outperform in 2023.
And some early data points look positive for the Eurozone compared to the US
The composite PMI reading – a closely watched measure of economic trends – fell to a 4-month low of 45 for the US in December. In contrast, the eurozone numbers rose to a 5-month high of 49.3, a hair’s breadth from the expansion range of 50.
Karsten Junius, chief economist at the Swiss bank J. Safra Sarasin, expects flat GDP growth in the eurozone this year, against a 0.5% decline in the US
However, he does not expect that this will translate into additional returns in the stock markets. One reason for this is the recent strengthening of euroswhich tends to weigh on earnings with a three-month lag, he told CNBC via email.
A number of strategists argued that while markets were driven by monetary policy in 2022, they will be more driven by economic data and earnings in 2023.
They include Joost van Leenders, senior investment strategist at Van Lanschot Kempen. Unlike Junius, he was more cautious about Europe’s economic outperformance, but said stocks could surprise to the upside.
“If there’s a recession in Europe and the U.S., there have to be downgrades in terms of weaker earnings across the board — the U.S. looks more advanced in that sense,” he told CNBC by phone.
“But if the recession in Europe turns out to be very shallow, then because the discount from Europe to the US is almost as wide as it’s ever been, that could be a trigger to unlock that valuation discount,” he added, as long as as the Fed does not start cutting interest rates and thus boost US-based growth stocks.
Paul O’Connor, head of the multi-asset team at asset management firm Janus Henderson Investors, agreed that there were “good reasons” to believe that an era of US equity markets had begun a reversal that could extend through 2023 and beyond.
“While the post-global financial crisis US equity exit was underpinned by superior US earnings momentum, this impact was amplified by a relative value shift in favor of US equities. Both trends are now reversing. While US equities look expensive relative to bonds and their own history , stocks in most other markets look reasonably valued,” he told CNBC.