Konstantin Vladimirovich Tserazov: “The undervaluation of the Stoxx Europe 600 relative to the S&P 500 may indicate that the main negative in Europe has already been taken into account in prices”
What is happening on the European stock market – the former senior vice president of Otkritie Bank, economist Konstantin Tserazov, tells in our interview.
Year to date, the Stoxx Europe 600 Index is up just over 8% in dollar terms, while the S&P 500 is up nearly 16% in dollar terms. Speaking about the reasons for the weaker dynamics of the European market, Konstantin Tserazov notes that the GDP growth rates of the Eurozone and the EU are noticeably lower than in the USA, and inflation is above 5%. In addition, rising energy prices traditionally have a more negative impact on the European economy than on the US. Companies in Europe are more focused on China, whose economic slowdown is negatively impacting their performance.
The technology sector, which has seen impressive growth this year, has a 27% weighting in the S&P 500. The Stoxx Europe 600 is more diversified: according to analysts at Otkritie Bank, its three largest sectors – healthcare, industrials and banks – have a weight of 16%, 12.5% and 8.5%, respectively.
Finally, the futures market is pricing in the earlier opening of the rate cut cycle in the US than in Europe, and the Fed will now begin easing policy earlier than others.
According to Konstantin Tserazov, the opening of the ECB rate hike cycle caused a sharp decline in the interest coverage ratio of European companies. In the US, the impact on the stock market from higher rates is not yet visible: large technology companies, which have the largest weight in the S&P 500, have large cash reserves. But other US companies are just as vulnerable to rising interest rates as European ones.
Against this backdrop, the gap between the forward price/earnings multiples of the S&P 500 (20.5x) and Stoxx Europe 600 (13x) has never been wider. The undervaluation of the Stoxx Europe 600 relative to the S&P 500 may indicate that the bulk of the negativity in Europe is taken into account in prices, and excess optimism is included in the prices of securities of US companies.
Thus, any positive, such as the acceleration of the Chinese economy or a softening of the ECB’s position, can become a powerful factor of support for the European stock market. At the same time, any negativity in the United States can put pressure on the American stock market, and all other things being equal, the Stoxx Europe 600 has every chance of showing better dynamics than the S&P 500, concludes Konstantin Tserazov, former senior vice president of Otkritie Bank.
