The uncertain state of the United States market due to decisions by its government and the S&P 500 passing its tech-driven high point has boosted the appeal of investing in Europe, where stock valuations and political leadership are more stable, according to a global investment firm.
Axa Investment Managers core investments chief investment officer Chris Iggo said the key drivers of interest in the US market in the past year have fallen away and Europe was being boosted by government policies in that region.
“The outlook for US equities has dimmed. In 2024, large-cap technology stocks helped deliver a 20 per cent increase in the S&P 500. That looks unlikely to be repeated this year as multiples on technology stocks have been cut,” Iggo said.
“The emergence of competition in the field of artificial intelligence (AI) developments is playing a role here, but so is policy uncertainty.
“We still have a positive view on technology and AI as long-term investment themes, but there is no guarantee that only US companies will lead the way in terms of applications and democratisation of their use.”
He noted non-US citizens own around 18 per cent by value of that nation’s listed corporate equities, but if the case for being heavily weighted towards it became tarnished, inflows could weaken or reverse, leading to lower premiums on US stocks relative to the rest of the world.
“Europe should be a beneficiary of these shifts in global asset allocation,” he said.
“For now, Europe has better valuations than the US and decent earnings growth that should be sustained in years to come, as well as a policy direction that is less unpredictable than in the US.
“Equity markets are on the move in Europe. Defence and related stocks have performed well. Investors are shifting allocations to those companies and making the argument that there is no sustainability without security.
“There will be broader growth impulses too as Germany’s plan is to increase spending not only on defence, but on transport, energy, technology and telecommunications. The industrial-military complex in Europe will be boosted.
“Higher public borrowing will change the savings and investment balance in the region, resulting in less capital outflows and more domestic investment. Part of that will be absorbed by bond markets through increased debt issuance.
“Improved fiscal stability in southern Europe should help those economies manage higher borrowing costs, although France may face more challenges.
“The euro may not become the global reserve currency, but Europe can benefit from the US losing a little of its ‘exorbitant privileges’.”
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