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Despite talk of the “Trump trade” and persistent pessimism about the European economy, European equities have been having their moment in the sun, outperforming US equities since November. As illustrated by the infographic, this reversal has been mainly driven by Europe’s largest sector overweights, notably financials and industrials. European financials significantly outperformed their US counterparts, while US industrials remained flat. Overall, we have seen a strong upward trend in European companies revising their future earnings, which has translated into improved market expectations. As a result, performance has caught up.
For this positive momentum to last, investors need to believe that further market broadening will occur and that the geopolitical headwinds that challenge the continent will not exacerbate an already weak economic outlook. A lot remains uncertain, and we have a balanced view: fundamentals do not yet suggest a new era, but removal of some of the headwinds would go a long way in supporting European markets. In the meantime, we see continued opportunity for security selection.
Figure 1: Europe's sector returns outpace the US year to date
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