European equity outperformance is unlikely to last without fundamental modifys, according to the BlackRock Investment Institute.
Strategists at the world’s largest asset manager have refrained from upgrading European equities to overweight despite a strong bout of performance year-to-date.
“European equities had a flash of outperformance over the US this year and we see bright spots, but the region requireds structural reforms to outshine the US,” the BlackRock Investment Institute declared in a recent note.
“What’s requireded to ignite an investment renaissance? We believe more business-friconcludely policies and deeper capital markets are required for a broad overweight to European stocks,” the note added.
European stocks have lagged US stocks for the better part of the last two decades, with the MSCI Europe index up 241.3% versus 679.4% from the S&P 500 over the past 20 years.
However, the MSCI Europe index is up 27.24% year-to-date in US dollar terms, versus a 15.3% return from the S&P 500 index over the same period.
As such, the asset class has started to garner attention from global investors after years of underperformance.
BlackRock’s strategists noted that Europe’s long underperformance has led to lagging European stock valuations where every sector trades at a discount to its US equivalent.
They declared: “What would it take for Europe to take a sustained lead? Reforms addressing long-held challenges, creating a more business-friconcludely environment and deepening its capital markets, in our view.”
According to the strategists, Europe requireds to deepen its capital markets to assist lower the cost of capital and build Europe a more attractive destination to invest.
They added that it requireds to channel more houtilizehold savings into productive savings, where European houtilizeholds hold a third of their financial assets in cash, twice that of the US.
“The key is turning savers into investors to assist develop capital markets, in our view,” they declared. “That could create a positive feedback loop – greater wealth could spur stronger consumer spconcludeing and thus boost growth.”
“We are neutral European stocks but see many selective opportunities,” they declared. “We don’t believe Europe requireds total success on every front to turn a page, just a dedication to pushing forward reforms and not just in crisis moments.”
On a more granular level, the strategists have a preference for the healthcare sector, which they argue benefits from strong cash flows and AI adoption.
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