An Early Christmas Rally for European Stocks

After over 19 months of underperformance and losses, European stocks are closing the year with a sharp upside move.

The EURO STOXX® 50 Index, the benchmark for Eurozone equities, has gained 6.8% this month through Dec. 16, beating other major regions. The move equates to a monthly advance of 11.4%, a performance not seen in any calendar month since the global financial crisis ended. The STOXX® Europe 600 Index, the pan-European benchmark, has gained 5.3% in December.

Since reaching a record on Apr. 13, 2015, the blue-chip EURO STOXX 50 lost 16% through November this year while the STOXX 600 fell 13%, with investors citing concerns related to non-performing loans in the region and the challenge of populist parties. The STOXX® USA 900 Index, by comparison, climbed 6.6% in the period while the STOXX® Global 1800 Index fell 0.4%.

Donald Trump’s presidential victory in the US and the Italian government’s defeat in a national referendum in early December have confounded earlier expectations with their effect on markets. After initial volatility, the dust settled and with both political hurdles cleared, investors turned back to a region that shows the developed world’s lowest valuations.

According to Bank of America data, European stocks are trading at 14.2 times their estimated earnings for the next 12 months. That’s the lowest ratio among six developed regions, and compares with an average multiple of 16 times for all six markets and 17 times for US equities.

The recent uptrend may help revert outflows from European shares. Investors have pulled out almost 100 billion dollars from US-based European equities funds this year, according to data from Bank of America and EPFR Global. They have withdrawn 27.5 billion dollars from US equities funds.

Whether this is a short-term rebound from oversold levels or the beginning of a more sustained turnaround remains to be seen. PULSE ONLINE will feature a 2017 outlook on European and global stocks at the start of next year.