Three reasons why European equities are set to continue outperforming – Morgan Stanley

MSCI Europe has now outperformed global-ex-US stocks by 10% over the last 6 months which represents its best period of relative returns since 1998. Strategists at Morgan Stanley see three further reasons to remain optimistic on European stocks for the remainder of the year.

See: S&P 500 Index to decline 10% and end the year at the 4000 level – Morgan Stanley 

The fundamental backdrop remains strong 

“Europe is arguably seeing the best economic momentum of any region just here with the data continuing to come in better than expected. Consensus now expects European profits to grow by more than 50% this year, boosted by strong pricing power which is allowing companies to raise prices to offset any challenges from higher input costs.”

Solid policy support

“Last month saw the ECB strengthen its forward guidance substantially which – in turn – prompted the market to push out the expected date of its first rate hike by 2 years to 2025. The prospect of continued policy support for another 4 years lifted longer-term inflation expectations to multi-year highs and pushed European real yields to a record low of -2%, further supporting the valuation case for European stocks which continue to look cheap to us versus either US equities or European bonds.”

Increasing challenges elsewhere

“Europe is now winning the vaccination race which is underpinning the economy's re-opening and potentially makes the region less vulnerable than peers to the Delta variant. This should boost investor optimism over the domestic outlook for 2022 at the same time as other regions are facing more uncertainty.”