Will Europe Outperform U.S. for 2020?

We are in the opinion that Europe might outperform US for 2020.  What makes me think Europe will outperform?  Here are some reasons:

1. In the past decade, the STOXX Europe 600 benchmark index earned an annual return of 8.1%, while the S&P 500 gained an annual 14.2% over the same stretch.  Europe had been under performing U.S. for more than a decade.
2. Most European countries have at least contained the spread of Covid-19.  However, U.S. has yet to show that it is able contain the spread.
3. On valuation front, using Shiller PE and Equity Risk Premium, Europe is more attractive than US (see chart below):

It is worth noting that U.S. economy is very much domestic driven where the consumer spending contributed almost 70% of its economy.  Obviously, if consumers don’t feel safe, policymakers and investors won’t be able to rely on this U.S. growth engine to power a robust recovery.

For now, most investors across Wall Street are expecting the U.S. economy and its markets to extend their outperformance.  A study conducted by Société Générale reveals that the general consensus believe U.S. to continue outperform Europe (except vs Germany):

In the case of Europe, the biggest threat would be EU’s summit to discuss the so-called recovery fund.

Reference:

MarketWatch, 2020-07-02, “Here’s why U.S. struggles with the coronavirus could lead to Europe’s stock market taking the lead”