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Global Weekly Commentary: Favoring Euro stocks in global restart
Key points
Eyeing Europe
We consider European stocks the most attractive regional exposure to a multi-speed global restart, especially versus emerging markets outside of north Asia.
Policy revolution
We could see a $1-1.5 trillion U.S. fiscal package that extends some, but not all, federal stimulus measures through late this year as lawmakers face a fiscal cliff.
Data watch
Estimates of Purchasing Managers’ Indexes (PMIs) in the U.S., Europe and Japan this week will offer investors an early peek at business sentiment.
As economies start to normalize, we see European equities as the most attractive regional exposure to a differentiated global reopening. The region sports a robust health infrastructure, exposure to a pickup in global growth, and galvanized policy response with room for more stimulus. As a result, we see it offering better risk-reward than traditional beneficiaries of a growth pickup: emerging markets (EMs).
Chart of the week
New Covid-19 cases as share of population, March-July 2020
Source: BlackRock Investment Institute, with data from European Centre for Disease Prevention and Control. Notes: . The chart shows the 7-day rolling average of new confirmed cases as a share of population. Regional aggregates are based on countries within the MSCI Europe, Emerging and Frontier Market indexes.
The pace of the activity restart depends on how successful countries are in suppressing the virus as they reopen, as we detail in our Midyear Outlook. This gives Europe a leg up versus much of the emerging world. Many EM countries have less robust public health systems, and the pandemic has not yet peaked. Infections have jumped in Latin America after an initial lag, as the chart shows, and are steadily rising in emerging Europe, Middle East and Africa (EMEA), and South Asia. By contrast, infections in developed Europe have been on a downward trajectory since peaking in April.
To be sure, EMs are heterogenous. The virus outbreak – and ability to withstand it – varies greatly by country. Many north Asian economies, for example, appear to have gained control of the epidemic – and have relatively strong balance sheets and the policy space to weather the downturn.
Europe’s health capabilities and containment measures position the region well for a domestic recovery. European companies also are highly geared to an improvement in global trade and recovering Chinese economy. Some EM economies are likely to benefit, too, and tech-focused Asian countries are showing early signs of a pickup in trade. Escalating U.S.-China trade tensions are a risk to market sentiment toward EM, European and Japanese equities alike in that respect. Europe, however, is less vulnerable to any renewed downturn in commodity prices than EM economies that are heavily exposed to commodities and natural resources, such as Russia and Brazil.
Importantly, the monetary and fiscal support to cushion the virus shock is stronger in Europe than in EM countries and Japan - and there is space and appetite for additional stimulus. After an initially slow start, the euro area has galvanized its policy response. The European Central Bank has made clear that it stands ready to add more monetary stimulus. Leaders of the 27 EU member states last week discussed a groundbreaking, joint economic recovery package at their first physical summit since the start of the coronavirus lockdown. Importantly, unprecedented coordination between fiscal and monetary authorities is allowing the region to unleash stimulus and bring down peripheral borrowing costs at the same time. By contrast, we see the policy space in many EM countries as much more limited, as many risk spiking interest rates and sliding currencies in response to more fiscal or monetary stimulus.
What are the risks in preferring Europe over EM? First, a surprise in the pandemic’s trajectory. This could range from a drop in EM infection rates to a virus resurgence in Europe. Second, EM equities could further outperform European peers if the U.S. dollar weakens against EM currencies or if the global growth upswing is much larger than we expect.
Bottom line: We are overweight European stocks due to the region’s strong public health systems and ramped-up policy response. We are underweight EM equities outside North Asia due to the pandemic’s spread and limited policy space. North Asia has the virus under control for now and has the capacity for more stimulus, keeping us neutral on both Japanese and Asia ex-Japan equities. We like U.S. equities for their quality bias, but the risk of fading fiscal stimulus and election uncertainty keep us neutral.
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