Why European Equities Have Outperformed American Equities Despite Recession: Insights from Paul Doyle of Columbia Threadneedle Investments

European equities have defied expectations and outperformed their American counterparts by 30% since the fall, marking the end of a decade-long period of underperformance. This surprising trend has been highlighted by Paul Doyle, the Head of Large Cap European Equities at Columbia Threadneedle Investments.

Doyle attributes this success to several positive factors for Europe, including a savings surplus, the financial stability of households, and a decrease in energy prices. Despite turbulence in the banking sector and rising interest rates, these factors have contributed to the strong performance of European equities.

The Eurozone has also benefited from mild winter weather, falling energy prices, and the reopening of the Chinese economy. These factors have boosted PMI indices and corporate earnings, reversing the trend of underperformance that has persisted since the global financial crisis. Additionally, a preference for value stocks and a structural growth deficit have further contributed to the Eurozone’s success.

Furthermore, Europe has experienced a surge in prices, with headline and underlying inflation figures in March reaching 0.9% and 1.2% month on month, respectively. This has led analysts to predict that interest rates will continue to rise, further supporting the performance of European equities.

In contrast, the American banking sector faces numerous challenges that are non-existent in Europe. European banks are stronger than they were during the global financial crisis, not facing a solvency crisis, and less exposed to interest rate risk. European banks also have smaller bond portfolios, and quantitative easing continues in Europe while the United States has begun to tighten its policy. Additionally, debt holdings represent a smaller percentage of deposits in Europe compared to the United States, allowing European banks to support more withdrawals before having to sell bonds.

The US market, on the other hand, remains expensive, with a forecast price/earnings ratio above 18. In comparison, the comparison between dividends and bond yields is much more favorable in Europe.

Overall, European equities have defied expectations and outperformed their American counterparts, signaling a positive shift in the European market. The strength of European banks, the boost from various economic factors, and the favorable comparison between dividends and bond yields have all contributed to this success. As Europe continues to navigate through the challenges of a technical recession, it remains to be seen how long this outperformance will last.

What specific stimulus measures has the European Central Bank implemented to boost the region’s economy

Depreciation of the euro, making European exports more competitive. Additionally, the European Central Bank’s stimulus measures have provided a boost to the region’s economy.

While the United States has experienced strong economic growth and a robust stock market in recent years, the performance of European equities has surpassed expectations. This has led many investors to shift their focus towards European markets in search of better returns.

According to Doyle, this outperformance is not just a short-term phenomenon, but rather the beginning of a longer-term trend. He believes that European equities still have room to grow, as the region’s economic fundamentals continue to improve.

However, there are potential risks that investors should be aware of. Political uncertainties, such as Brexit and ongoing trade tensions, could pose challenges for European markets. Additionally, the impact of rising interest rates and changes in monetary policy could affect the performance of equities in the region.

Despite these risks, Doyle remains optimistic about the future of European equities. He believes that the region’s strong economic fundamentals, combined with positive factors such as savings surplus and falling energy prices, will continue to drive growth in the market.

Overall, the recent outperformance of European equities has surprised many investors and marked the end of a period of underperformance. With positive factors such as a savings surplus and falling energy prices contributing to the region’s success, European equities are poised for further growth in the coming years.