Will Europe surpass the United States?

“An ex-colleague of mine from the US used to say Europe was a great place to travel, a great place to live, but a terrible place to invest,” Stephen Bell, Head of Europe, Middle East and Africa at Columbia Threadneedle, begins his weekly commentary. Whether or not that holds true in the long run, he believes the outlook for 2023 is better for European stocks than for their US counterparts: the fourth quarter of 2022 is in full swing for European companies, while the S&P 500- is in the US. The United States is almost complete. The United States has not seen energy costs as high as Europe over the past year, but even so, companies there have underperformed their European counterparts in almost every way. In particular, pressure on margins has been very severe for S&P 500 companies but much less for companies in Europe and the UK. Additionally, results in Europe exceeded expectations while disappointing in the United States.

The biggest news in Europe is the drop in energy prices, which were extraordinarily high last fall. These high energy prices have pushed inflation to double digits in Europe and the UK and shaken consumer confidence. Nervous consumers have been increasing their savings even though there is still a large pile of unused savings from the Covid crisis. In contrast, more confident American consumers relied on their savings.

“There is a plausible scenario where European consumers regain their confidence and start spending – businesses will benefit from this increased demand and lower energy costs.”

Energy prices fell and European stocks outperformed the others. So some may be wondering if all this good news has actually been priced in. Stephen Bell doesn’t think so: Investor confidence surveys in Europe continue to paint a bleak picture. The recently released Sentix came in weaker than expected and well below the pre-recovery average. There are a lot of upsides here, and economists are just starting to upgrade their growth forecasts. Analysts will likely react to this with higher earnings estimates.

Another factor is Europe’s greater dependence on China. This was a disadvantage for Europe – compared to the US – during China’s disastrous zero interest rate policy. This is an advantage, says the chief economist, now that China’s economy has recovered.

Of course, the news isn’t all good, and the recent inflation numbers have been somewhat disappointing. The ECB will likely react to this by raising interest rates. But inflationary pressures have also picked up in the US, and the economy there appears to be heading into recession as credit standards tighten and consumers’ arrears rise, albeit from low levels.

Bell believes that the economic outlook for Europe will soon improve. Even more so in the UK, where the Bank of England and the Office for Budget Responsibility are likely to raise growth forecasts and lower inflation expectations. There is no doubt that warnings of trouble will continue in the medium term. However, the grim pessimism that has characterized the latest forecasts should be replaced with a healthy dose of optimism. That would definitely give the stock a boost.

By Stephen Bell, Chief Economist for Europe, the Middle East, and Africa at Columbia Threadneedle Investments

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