Eurozone shares advanced further in January, as global investors reassess the region’s prospects relative to other geographies. Holding large investments in US stocks seems unprudent in the current environment, and other major options except Eurozone in the equity space are Emerging Markets and Japan. Whereas emerging markets correlate heavily with weakening commodities market and have additional geopolitical risks, Japan currently is in the midst of a long-awaited shift in economic trajectory which is difficult to bet on. The obvious choice now to reallocate capital in developed markets equity funds is thus the Eurozone.
Mild winter resulted in reduced energy demand, allaying fears of shortages, although energy costs remain the biggest component driving higher inflation. As natural gas prices are dropping to 2021 pre-war levels, confidence in more predictable economic environment increase and some corporations are now reviving their production plans and regular long-term planning activities.
On a relative basis, global investors are attracted into European stocks by their low multiples compared to the US, the idea that most damage from energy crisis is already done, and the prospects of strengthening euro. There is little chance to be caught in some overvalued IT-company propelled to the skies by retail investors hype, and a lot of room to find cheap banks and healthcare stocks. Another idea among the community is that the China recovery might boost eurozone economy in the coming months, providing additional consumer demand to the services and industrial sectors.
But, nonetheless, we think that even for the Eurozone, 2023 should be the year where bonds would shine the most, not stocks. As the risks are still plenty, and the recovery is yet to be seen. Stocks growth appears to be fueled only by hopes and expectations for now.
Importantly we should mention that recovery in the Eurozone was also supported by the recovery in euro currency. Recent trends (falling US inflation, China reopening) may lead to appreciation of EUR/USD to the 1.15 area in mid-2023.