Why European Stocks Outperform US Ones

European markets are off to a good start in 2023, despite dark clouds lingering. In this video market strategist Michael Field explains the reasons for the comeback

Johanna Englundh 15 February, 2023 | 9:05AM
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Johanna Englundh: Welcome to Morningstar. The stock market year of 2023 has really come off to a great start here in Europe, and surprisingly, our European markets have been outperforming the American market during these last few months. With me today is Morningstar's European Market Strategist, Michael Field, who will explain what's going on.

Michael, I think that this outperformance might come as a surprise to many investors. I mean, we are battling pretty big issues here in Europe with war, inflation and ongoing energy crisis and so on. What is behind this outperformance?

Michael Field: Yeah. So, I think people looking from the outside, Johanna, at the stock market performance are going to be a little bit surprised to see Europe outperforming given all the issues that you've mentioned. But I think bigger picture here, Europe drastically underperformed the U.S. last year. It got beaten up far worse than the U.S., and there were valid reasons for this, right? We're much closer to the Ukraine situation. We have potential energy shortages. Inflation seems to be a bit more of a problem, particularly in the U.K. So, as we got a little bit more optimism toward the end of the year and the beginning of this year, then Europe kind of leapfrogged the U.S. and recovered a lot of that lost ground.

JE: Okay. So, is there anything during these last months where you've followed the stock market that surprised you?

MF: I think the speed of the recovery probably surprised me. Ultimately, we had said back in October the market is drastically undervalued, that there's this huge opportunity there for longer-term thinking investors. And we thought eventually the market would recover and it would catch up to that level that we think the market is worth. But what surprised this year is how quickly investors have turned their attitudes and suddenly become far more optimistic about this. And all it really took was a few months of seeing inflation fall a little bit, and then that gave them confidence around interest rate decisions and potential recession as well, and that's snowballed into the positive performance that you've seen to-date.

JE: Okay. So, if we then look at a bit at the future – and I know it's always hard to predict the future – but should we expect this outperformance to last?

MF: So, it's always difficult to say whether it's going to keep up from that perspective. I think ultimately if you look at markets where they are now and where we think they're valued, we're still slightly below the level at which we think they're valued. So, there's nothing to say that markets should fall dramatically from here. They haven't even really caught up with where they're valued. That being said, there's plenty of macro risks out there and that could influence markets negatively if something goes wrong.

JE: Okay. So, what would you say then are the biggest risks in the market right now?

MF: I think in the old days you could probably name one thing and it could be a nebulous concept, and people would say, okay. Whereas now, we've got some really clear risks to look at. We've had a few months of inflation falling, but there's nothing to say that that doesn't pick up again, particularly in Europe where trade union contracts and things like this are being renegotiated this year. So, you could see a tick in inflation up again. Energy shortages again could become an issue depending on how long the winter lasts and how well the eurozone governments replenish their reserves over the summer et cetera. So, that's another risk. Recession ultimately as well. We're teetering on the brink of recession constantly. So, there's nothing to say we wouldn't fall back into recession again. And you see business insolvencies and stuff like this as a result. So, I think there's a multitude of risks there, and I think we really need to be aware of that.

JE: Plenty of risks then out there. So, thank you so much, Michael, for joining us today and giving us a bit of insight into what the markets are at at the moment. Until next time, I'm Johanna Englundh for Morningstar.

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Johanna Englundh  Johanna Englundh is an editor for Morningstar in Sweden 

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