over 3 years ago • 3 mins
So no one told Europe life was gonna be this way: a global pandemic, forced teamwork, and now, the expectation that the region’s stocks will outperform the US’s going forward.
The ECB can only do so much against a pandemic on its own, and drew the line at lowering eurozone interest rates further for fear of hurting the region’s banks even more. And since they needed to be fighting fit to help European businesses get out of the trouble coronavirus has put them in, that’s where the ECB focused its efforts. It announced a fresh set of ultra-cheap loans available to banks that would in turn encourage them to lend more money to customers in need, while also encouraging individual countries to do more themselves.
Germany stepped up to the plate: in June, it announced sweeping tax cuts, cash payments, additional small business loans, and infrastructure spending. Other countries, like Italy, have tried to do the same, but an already-high debt might’ve meant they lacked the flexibility to spend as much as necessary. Since then, European leaders have been discussing the possibility of issuing eurozone-wide loans for the first time ever, which could then be distributed to those most in need. But while it’d have the advantage of bringing the eurozone closer together, the bloc’s more frugal members seemed reluctant to be on the hook for other countries’ debts.
Still, this week they all came together to strike a deal. It’ll give the most-in-need European countries and industries grants and cheap loans worth $860 billion, double down on the region’s environmentally friendly agenda, and involve $1 trillion of annual eurozone spending until 2027. Some investment analysts reckon that’s a good – no, a great – thing for Europe as it sets up the region’s stocks to do better than their US counterparts.
Analysts who are now more positive – or “bullish” – on European stocks over American ones argue the eurozone’s alliance has been strengthened by its new “fiscal” – i.e. government spending – alliance. That makes it similar to the US – where, ironically, the country’s own fiscal union hasn’t helped its lawmakers agree on how to spend additional coronavirus support, or how much. Combine that with both the stronger anti-pandemic response in Europe than the US and the absence of potentially disruptive elections this year, and Europe’s economic growth is likely on a stronger path – and its stocks on a surer footing than American ones.
A bet that the eurozone will outperform the US is implicitly a bet that cheap-looking “value” stocks will outperform “growth” stocks (which are expected to deliver high earnings growth). That’s a bet investors would’ve lost over the last decade, so it’s understandable if some of them are still gunshy. They could bet on Asian stocks instead, which wouldn’t be bet against growth in quite the same way. That’s because Asian – and particularly Chinese – stock market indexes have a greater proportion of high-growth tech stocks like the US, meaning investors wouldn’t miss out like they would if they focused on the less tech-heavy European stock market.
Tech giant Intel reported mixed earnings last week. On the one hand, it made more money than expected and offered a forecast for the rest of the year – a sure sign things are getting back to normal post pandemic. On the other, that forecast fell well short of investors’ expectations, partly down to a delay in the release of its next-generation microchips putting pressure on its profits. No surprise, then, that Intel’s stock fell 10% on Friday.
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