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European Stocks Claw Back Record High, Erasing Pandemic Losses

This content was published on April 6, 2021 - 16:09

(Bloomberg) -- European stocks rose to a record high, more than a year after the pandemic spurred a market collapse, as investors looked past the region’s slow pace of vaccinations and focused on prospects for a global economic recovery.

The Stoxx Europe 600 Index gained as much as 1% to 436.47 before ending the session up 0.7%, surpassing a peak of 433.9 reached on Feb. 19 last year. Cyclicals such as miners and automakers led the advance, while travel and leisure stocks also rose, lifted by cruise operator Carnival Plc.

With Europe’s markets reopening after the Easter break, shares followed Wall Street’s Monday rally as solid U.S. data added to evidence the recovery is gaining momentum. Rising government bond yields have also boosted the appeal of economically sensitive sectors in 2021, while weighing on frothier parts such as technology. That’s helping Europe’s outperformance, as it is heavily exposed to cheap and cyclical shares.

The likes of JPMorgan Chase & Co. and Amundi SA, the region’s biggest asset manager, say that European stocks can outperform the U.S. this year, despite concerns over the slow vaccination pace and lockdowns in major economies like France and Italy.

“It’s quite impressive, or baffling, whatever you choose to call it, how the market seems to be looking through the bumps in the road to reopening,” Ian Williams, a strategist at Peel Hunt, said by phone. “It’s almost like any kind of negative news seems to be shrugged off very easily.”

The Stoxx 600’s record comes as the S&P 500 and MSCI All-Country World indexes already trade at all-time highs. Within Europe, German and Nordic markets hit the milestone of recouping lockdown losses early on, with the DAX Index rising to a record as early as December.

Benchmarks of Greece and Spain remain well below last year’s levels, though France’s CAC 40 climbed to its highest since June 2007. U.K. shares, especially domestically-focused ones, have started to catch up after Britain struck a Brexit deal and made faster progress on Covid-19 jabs than the continent. The FTSE 250 Index has gained 7.4% this year and is also approaching an all-time high.

Cyclical Catch-Up

Sector-wise, while defensives such as tech and consumer staples led Europe’s initial rebound from the virus-fueled rout, cyclical industries have rallied sharply since. Miners, autos and travel shares have more than doubled since the market low in March 2020, while value sectors such as energy are starting to catch up. Banks are among the best performers this year.

“European equity markets have a higher percentage tilt/allocation to the more distressed cyclical and value parts of the market that performed poorly not only in 2020, but for several years before as well,” Niall Gallagher, investment director of European equities at GAM, said by email. “Any change in the economic environment that sees a pick-up in growth and a pick-up in inflation is likely to positively impact these sectors.”

Gallagher said European countries should be able to boost their vaccine rollout in the next couple of months as supplies improve, allowing for restrictions to be eased and tourism to open up toward the end of the quarter.

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