Global money is flowing into European stocks at a record scale. Analysts say Europe is emerging as an alternative to U.S. shares, which face mounting overvaluation concerns, because European markets carry relatively lighter valuation burdens and have a higher share of real-economy cyclical sectors such as defense and industrials.
According to EPFR, which tracks exchange-traded fund (ETF) and mutual fund flows, about $10 billion has flowed into European stocks for two straight weeks. The Financial Times (FT) said, "At this pace, February is expected to set a record high on a monthly basis." The blue-chip Stoxx Europe 600 index climbed to a record high of 628.69 on the 18th, and the main stock indexes of individual European markets including the United Kingdom, France and Spain also hit record highs this month.
With the U.S. market seeing sharp swings this year on fears of an artificial intelligence (AI) bubble, demand has risen for relatively undervalued European stocks, analysts say. The price-earnings ratio (PER) of the Stoxx Europe 600 is 18.3, far below the 27.7 of the Standard & Poor's (S&P) 500. Sharon Bell, senior equity strategist at Goldman Sachs, said, "Many global investors want diversification away from the expensive U.S. market," and "Europe is not tech-heavy and offers different opportunities." Analysts at Bank of America also recently raised their investment view on German stocks to "overweight."
Interest in European defense stocks is also growing. Defense shares have extended last year's rally into this year. Germany's Rheinmetall has risen about 10% so far this year and has nearly doubled over the past year. The United Kingdom's BAE Systems has also climbed more than 70% in the past year.
Some caution, however, that with profit growth rates for European corporations expected to lag far behind the United States, it remains to be seen whether the inflows mark a structural shift or just short-term portfolio rebalancing. According to Barclays, in the ongoing fourth-quarter earnings season, year-over-year profit growth rate for S&P 500 corporations is expected to top 12%, while Europe is seen at 4%.