Will Europe overtake America?

“A former colleague of mine from the US says Europe is a great place to travel, a great place to live, but a terrible place to invest,” begins Steven Bell, head of EMEA in his weekly commentary for Columbia Threadneedle. Whether or not that holds true in the long run, he believes the outlook for 2023 is better for European stocks than their US counterparts: the fourth-quarter 2022 earnings season is in full swing for European companies, while the S&P 500-company US is almost complete. The U.S. hasn’t seen as big a rise in energy costs as Europe in the past year, but even so, companies there have underperformed their European counterparts in nearly every category. In particular, pressure on margins is most severe for S&P 500 companies but least for companies in Europe and the UK. Additionally, results in Europe beat expectations while disappointing in the US.

The most important news in Europe is the fall in energy prices, which were unusually high last fall. These high energy prices pushed inflation into double digits in Europe and the UK and eroded consumer confidence. Despite the huge pile of untapped savings since the Covid crisis, nervous consumers are topping up their savings. In contrast, more confident US consumers drew on their savings.

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

Energy prices have fallen and European stocks have outperformed others. So some may wonder if all this good news has already been priced in. Steven Bell doesn’t think so: Surveys of investor confidence in Europe continue to paint a bleak picture. The recently released Centix index came in weaker than expected and well below its pre-recovery average. There is a lot of upside here, and economists are starting to upgrade their growth forecasts. Analysts will counter this with higher earnings estimates.

Another factor is that Europe is highly dependent on China. This put Europe – relative to the US – at a disadvantage during China’s disastrous zero interest rate policy. But now that China’s economy is recovering, this is a boon, says the chief economist.

Of course, the news isn’t all good, and the latest inflation numbers are disappointing. The European Central Bank may react with higher interest rates. But inflationary pressures have mounted in the US, and the economy there appears headed for a recession as credit standards tighten and consumer balances rise from low levels.

Bell believes the economic outlook for Europe will soon improve. More so in the UK, the Bank of England and the Office for Budget Responsibility will raise growth forecasts and lower inflation forecasts. No doubt warnings of trouble will continue to be heard in the medium term. However, the gloomy pessimism that has characterized recent forecasts should be replaced by a healthy dose of optimism. That will certainly give the stock a boost.

By Steven Bell, Chief Economist EMEA at Columbia Threadneedle Investments

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