While U.S. stocks have hogged the limelight in recent years, it may be time for their “poor cousins,” European equities, to shine.
The Euro Stoxx 50 – a stock index of euro zone blue chip stocks – rose just 4.4 percent in 2014, lagging the U.S benchmark S&P 500’s 11.4 percent gain, as the single currency bloc grappled with slowing economic growth and the threat of recession.
Bronka Rzepkowski, euro zone senior economist at Oxford Economics, who is calling for euro zone stocks to outperform their U.S. counterparts, says her bullish outlook is based on two factors: a rebound in corporate earnings and attractive valuations on a relative basis.
“In our call of euro zone stocks outperforming U.S. ones, the outlook for profit margins is key,” Rzepkowski wrote in a note published on Tuesday.
In addition, low interest rates could also help margins by reducing debt servicing costs, she added.
By contrast, U.S. corporates may face a slight compression in margins given headwinds such as a stronger U.S. dollar, firmer wage growth and the possibility of rising interest rates.
“With margins potentially having passed their peak, the risk-reward for equities becomes less appealing and given unattractive valuations, investors may start to disengage somewhat,” Rzepkowski said.