(Bloomberg Opinion) -- Probably the most underrated skill in finance is knowing when to sell. Most of the focus is on what and when to buy, but crystallizing gains before they evaporate is the mark of a successful fund manager. So after 15 years of US equity outperformance versus Europe, is it time to roll out of an expensive stock market and look across the Atlantic? The short answer is no, because the relative strengths of the respective economies still favor US stocks.
Investors have made about 10% on US stocks this year, double what's available in Europe. That's on a total return basis in dollars, but the picture is roughly the same either in euros or when measured in local currencies. On a 15-year horizon, the divide is even more extreme, with money invested in the benchmark US index increasing fivefold versus less than a doubling in Europe.
Still, the S&P 500 has had a mixed year. While the benchmark index is up by almost 9%, it would be in negative territory if not for the Magnificent Seven technology stocks. The tech-heavy Nasdaq index is up 23%, yet the Russell 2000 mid cap index is down 5.6%. Sector selection is evidently the most valuable skill set for a portfolio manager.
Most European equity indexes have put in modest gains this year, with Italy leading the charge. European banks, which are often a favorite play for US funds looking to trade international anomalies, are certainly cheap, trading at deep discounts to their net-asset values. For example, Societe Generale SA, the mainstream French lender, trades at less than 0.3 times its tangible book value. But timing is everything. While this year has seen double-digit gains for Europe's banking sector, the sector's benchmark index still languishes at a fifth of its pre-global financial crisis high. Investor clearly don't foresee any catalyst to drive values higher; European bank mergers tend to be a last resort in desperate times rather than coming from a position of strength.
The euro area is stagnating on the cusp of recession, whereas the US economy grew at a near 5% annual pace in the third quarter. So on a macroeconomic basis, there is little compelling rationale to rotate into the old economies of Europe which are suffering from a serious downturn after a series of systemic shocks. The pandemic, the war in Ukraine and China's troubles have all hit Europe harder. While there are plenty of value plays in Europe, tech- and AI-powered growth stocks are much easier to find in the US market.
The outperformance of the US economy compared with Europe is showing up loud and clear in third-quarter corporate earnings. Four out of five of S&P 500 companies reporting this season have beaten expectations, with average earnings per share growing by 12%. The Stoxx Europe 600 picture is considerably less rosy with just over half so far exceeding estimates, mirroring a similarly lackluster second quarter. The underlying picture is even cloudier, with average earnings per share falling at an 8% annual pace. JP Morgan Chase & Co. Analysts note that euro-area revenue growth is "exceptionally weak."
A little more than a quarter of the revenue for large-cap euro area companies emanates from within the bloc, where growth is sadly moribund. A similar amount is generated from Asia, predominately China, which is still struggling to recover from the pandemic. It is really only in the US that income growth for euro-based companies is healthy. It makes the argument to invest in Europe somewhat tortuous. Even if the European Central Bank is forced into cutting its official rates before the Federal Reserve next year, it would provide only a brief fillip, coming from a position of weakness rather than strength. Both regions are enduring much higher bond yields, but the pressure on profitability is more acute on indebted euro companies. Longer-term, the big swing factors such as demographics and (de)globalization also favor the US. The US reproduction rate at 1.78 children per mother, compares favorably to the EU average of 1.53. It drops to below 1.2 births in Italy. President Joe Biden's administration has stolen the march on the European Union with its ongoing fiscal stimulus push. The Inflation Reduction Act is proving a game changer for new US manufacturing facilities. Onshoring can't work everywhere, and Europe is the big loser as energy costs have soared in the region.
The currency factor is a vital consideration. The euro is at 1.06 cents to the dollar, languishing near the lower end of its range since its inception in 1999. The chances of it falling below parity in the relatively near future remain high as the US currency's reserve status holds strong. A strong currency naturally attracts foreign inflow and, just as importantly, discourages domestic monies from looking elsewhere. The US population invest far more readily in equities than European retail savers who tend to veer more towards bonds, so there's also a home crowd advantage for the stock market.
As the S&P looks expensive on pretty much any valuation metric, the risks of remaining overweight in US stocks have surely increased as the market drivers become ever more tech-centric. Nonetheless, the US equity market remains the least dirty shirt in the global laundry basket, at least for the foreseeable future. The level of innovation is just so much higher and access to that in listed equities is much more available. Keenly watching when to take profits from a frothy US tech space doesn't translate to the grass being greener on the other side of the pond.
More From Bloomberg Opinion:
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Bonds as Diversifiers Aren't Dead — Just Dormant: Jonathan Levin
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Europe Still Has Half of Stagflation to Solve: Marcus Ashworth
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.
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