European equity markets to continue outperforming US, says Neuberger Berman

US EU

Europe is poised to continue outperforming the US for the rest of the year, according to New York-based global asset manager Neuberger Berman, as uncertainty over the outcome of the US presidential election and the ongoing coronavirus pandemic continue to weigh on markets.

The MSCI Europe has shot up 23 per cent since mid-May, compared to a weaker 18 per cent rise on the S&P 500 US large-cap index.

Investors are regaining interest in Europe, a region that many global allocators have regarded in recent years as low-growth. Data from Morningstar showed the first positive flows into actively-managed European equities in June in over two years.

Neuberger Berman, which has over USD300 billion in assets under management, says it has noticed an “underlying rotation in global markets” since the middle of the second quarter of 2020, with Europe outperforming the US. 

“In our view, the rotation since mid-May has the potential to continue for the remainder of the year and beyond,” says Benjamin Segal, senior portfolio manager at the firm.

European countries’ handling of the coronavirus pandemic, coupled with the Euro’s recent strength, have increased the asset manager’s confidence in the region.

Segal explains: “Firstly, Europe is ahead of the US in controlling the virus. New infection rates across the region have remained low despite recent local flare-ups in some countries, while the number of Covid-19 cases in the US remains high. And unlike the interruptions and delays that the US has experienced in reopening its economy, many European countries have been able to safely re-open more quickly.”

This view was shared by the world’s largest asset manager, BlackRock, in its mid-year outlook, saying it expects European stocks to outperform their US counterparts thanks to the public health and fiscal stimulus response to the coronavirus pandemic.

Neuberger Berman also highlights currency strength as another benefit to European markets.

“Perhaps more importantly, the euro area has made substantial progress in area-wide risk sharing in recent weeks, which should significantly reduce the risk of any further fracturing of the single market post-Brexit.” 

Europe's single currency has rallied by more than 10 per cent against the dollar since late May.

“The ECB expanded its pandemic Quantitative Easing program earlier in June and, given very low inflation, is likely to continue with sizeable sovereign bond purchases for some time. Moreover, the European Commission’s proposal for the Recovery Plan is significant, focused on grants and skewed towards weaker southern European countries,” says Segal. 

Segal notes that though the longer-run fiscal outlook remains “very challenging” in southern Europe, the euro area fiscal position looks more favourable than in the US. 

“The strength of the euro versus the dollar should be maintained at least throughout the year, given expected volatility around the US presidential elections, further supporting capital flows into Europe,” he says.

Segal says that while European valuations on companies with high profit margins and high growth look “stretched”, there are individual European names that currently reflect “a degree of investor scepticism”. 

These ‘hidden quality’ businesses, according to Neuberger Berman, are overwhelmingly present in the industrials and consumer discretionary sectors, with examples including staffing firm Adecco and apparel company Adidas.