Until now, the eurozone equity market has significantly underperformed the US equity market. Economists at Natixis want to show that we should now expect the European equity market to catch up and to perform strongly, for a number of reasons.
European equities should perform well relative to US equities
“The European market is currently undervalued as shown by the high level of the equity risk premium and the low level of equity valuation.”
“The eurozone economy has remained depressed for much longer than the US economy. But we should expect a strong recovery in the European economy from the end of the second quarter of 2021 due to the progress in vaccination, the upswing in global trade, the recovery plans, which, contrary to a widely held notion, are as significant in the eurozone as in the United States and growth provided by the normalisation of consumption behaviour and spending of part of the accumulated forced savings.”
“The upturn in euro-zone corporate earnings has also lagged behind the United States, but will be considerable as soon as growth returns due to small wage increases and the upturn in productivity that will be generated by the upswing in activity. One must be careful when comparing per capita productivity between the United States and the eurozone, given the bias provided by short-time working in the eurozone.”
“Under-employment will take longer to correct in the euro zone than in the United States. GDP is expected to return to its pre-crisis trend in the second quarter of 2022 in the United States and in the second quarter of 2023 in the eurozone. This should prompt the ECB to maintain a highly expansionary monetary policy for longer than the Federal Reserve, with bond purchases. Long-term interest rates may therefore remain low for a long time in the eurozone.”
“Given the persistently low long-term interest rates and the very low – or even negative – return on bond investments eurozone savers will buy more equities, which is already visible. The euro-zone equity market is also attracting non-residents.”