Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
In a regional allocation, we had a preference for International equities, and within that for Europe over the US, in the past year. We believe that the time has come to close the trade of OW Eurozone vs the US. Europe was the least liked region last summer, when the consensus of economists was that it has already entered a recession, but it has transitioned to a consensus long, a preferred play on China rebound, and has...
Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy
In a regional allocation, we had a preference for International equities, and within that for Europe over the US, in the past year. We believe that the time has come to close the trade of OW Eurozone vs the US. Europe was the least liked region last summer, when the consensus of economists was that it has already entered a recession, but it has transitioned to a consensus long, a preferred play on China rebound, and has enjoyed a big move up in activity, from 47 Euro Composite PMI in November to 54 currently. Given this, from the low last September to last week, Eurozone equities have advanced as much as 30% vs the US. One should be locking in these gains, especially if our current sector and style views of more Defensive leadership keep gaining traction – Eurozone has always been a global Cyclical Value play. The best of the improvement in Eurozone activity is likely behind us, CESI just turned negative. In contrast, ECB is likely to stay hawkish, due to persistent inflation, implying that the Growth–Policy tradeoff is likely to deteriorate. The region still screens cheap, but it historically acted as a high-beta play on the way down, when discounting past US recessions. China reopening clearly helped European performance, both directly and indirectly, as many investors preferred to position through non-China stocks. However, the best of the momentum is likely behind us, with peaking in China CESI and PMIs, and with many mobility metrics having normalized. Unless China delivers a meaningful fiscal stimulus in the near term, it is unlikely that it will be a positive catalyst for European equities from here. With this change, we now have the following pecking order regionally: we are OW UK, Japan and smaller parts of DM, such as Switzerland, we stay unexcited by EM, Neutral vs DM, and we keep UW in the US, now joined with an UW in Eurozone.
This podcast was recorded on 08 May 2023.
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