Neglect U.S. shares — UBS says Europe’s are a greater guess. This is why

European shares at the moment are extra engaging than their U.S. counterparts, in response to Swiss Financial institution UBS, with elements corresponding to financial knowledge, rates of interest and earnings taking part in a key position.

In a word entitled: “A U-Turn: Favouring Europe over US equities,” the financial institution’s strategists mentioned European shares excluding the U.Ok. now outrank the U.S. on its “regional scorecard.” Japan is prime of its checklist, the U.Ok. is second and Europe is available in third.

UBS outlined quite a lot of causes for its “U-turn,” particularly given U.S. markets are likely to outperform European ones.

UBS’ name would possibly come as a shock provided that U.S. financial progress has vastly outperformed of late, with U.S. GDP coming in at 1.6% for the primary quarter of 2024 whereas eurozone GDP got here in at 0.3% over the identical interval. Nevertheless, UBS forecasts that this hole between the 2 areas might quickly shut.

Indicators tracked by the financial institution — corresponding to buying managers’ index (PMI) knowledge — recommend an upside danger to European GDP, and a draw back danger to U.S. GDP, the financial institution mentioned.

Extra financial savings in Europe are additionally larger, and never as broadly used as within the U.S., and financial institution lending situations for corporations are looser in Europe which additionally may gain advantage progress, UBS famous.

Financial coverage is one other key space to look at, the Swiss financial institution mentioned. Some of Europe’s central banks have already begun easing, and the European Central Financial institution is anticipated to take action as quickly as June. With inflation easing extra steadily in Europe than the U.S., the “path to lower rates is much clearer,” UBS mentioned.

Fashions additionally present that charge cuts in Europe are set to spice up the economic system greater than they may within the U.S., UBS mentioned.

Europe’s valuations have additionally began to look extra engaging in latest months, UBS mentioned. The so-called fairness danger premium (ERP) — or the surplus return on investing in shares in comparison with risk-free alternate options — is way larger in Europe than the U.S., the financial institution discovered.

“The ERP in Europe is 2.1pp [percentage points] 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,” the strategists highlighted.

Relative earnings momentum can also be “moving in Europe’s favor,” UBS mentioned, with a weaker euro and stronger PMIs anticipated to spice up earnings revisions.

“European profit margins (critically, ex financials) are far less extended than the US, and in the US 67% of the margin improvement came from unsustainable factors (lower rates and lower tax) compared to just 3% in Europe,” the strategists wrote.

Lastly, whereas Europe is critically missing in expertise shares — which has been a key think about its underperformance — round 40% of its market cap is made up of corporations which can be industry-leading or distinctive, UBS mentioned, and haven’t any U.S.-based direct rivals.