European stock markets have been star performers recently. After a lengthy period of mostly disappointing returns, the wind has turned in favor of European equities. Is the new strength going to last?

By Daniel Brüesch, Head Vontobel Wealth Management Investment Office, based at Vontobel Headquarters in Zurich

The performance of international stock markets since the start of the year has been rather unusual: European stock indices have done better than their U.S. counterparts during the first months of this year.

This is all the more astonishing, considering that in March the United Kingdom gave formal notice of its intention to leave the European Union (EU).

Europe is Getting Stronger

While over many years investors’ focus lay on the risk of a crumbling of the Eurozone, the clouds over the old continent have now lifted and cleared the view for promising developments. Not only did the gross domestic product (GDP) of the Eurozone grow faster than that of the U.S. last year, its economies expanded at more than double the speed than those of the U.S. and U.K. in the first quarter of this year.

This is even more surprising considering the uncertainties regarding the evolving Brexit negotiations and European elections. After a long period characterized by fiscal instability, the crisis around Greece and the Euro as well as doubts about the viability of the EU, European economies are now displaying considerable strength.

Further Dynamics in Europe

While recent economic fundamentals help to dispel worries about Europe, potential future dynamics are what investors should especially focus on. With French president Emmanuel Macron’s progressive En Marche! party long needed reforms may finally be realized in the Eurozone’s second-largest economy.

Furthermore, a possible French-German led stimulus initiative could accelerate the current EU growth path and ensure its sustainability. European companies and consumers alike are already showing very high confidence levels. With a drop in unemployment to its lowest level since eight years, consumer confidence reached a decade high in May.

Eurozone purchasing managers’ confidence does not lag behind with record index levels since 2011. After a good start into the year and signs of a further broad-based acceleration in growth, the European Central Bank (ECB) has recently raised its forecast for European growth to the highest level in almost 10 years. There are clear signs of a revitalization that may keep it on a long-term growth track.

Europe Should Not Be Missed

Already from the start of this year we at Vontobel called for an outperformance of European versus U.S. equities and still keep this positive outlook. However, if only for diversification reasons, European equities should be a fixed part in any portfolio as the European Union is representing almost 20 percent and the Eurozone 10 percent of global market capitalization.

At the same time, we see cheaper valuations compared to the U.S. in terms of expected price-earnings-ratios, which reduces the downside risks of European stocks while providing upside potential. Additionally, corporate earnings are currently growing faster in Europe.

Europe Differs Widely

There are a number of opportunities for investors looking to participate in the growth potential of European equities. However, despite representing a single market, Europe differs widely by region not only in terms of cultures and languages, but also in economic strength and competitiveness. This makes an active selection of equities even more crucial.

Exposure can be achieved through selected individual stocks or investment funds, for example. Structured products focused on specific investment themes or sectors are also an option to consider.