European stocks were out of favour throughout 2020 until November’s rip-roaring comeback. The sheer extent of the turnaround – the Stoxx 600’s 16.7 per cent gain was its biggest-ever monthly advance, while energy and financial indices enjoyed astonishing gains of 34 and 26 per cent respectively – raises the question: is it too late to rotate into the previously unloved European market?
Not necessarily. The market rotation out of growth and into value has been violent but not climactic: momentum stocks are still outperforming their value counterparts by 27 per cent this year, notes Bloomberg's John Authers, so there is still time to benefit from a gradual normalisation of economic conditions in 2021.
Even after the recent rally, 2020 is likely to be the worst year for European relative-equity performance since the 1980s, Morgan Stanley notes in its 2021 outlook. It argues Europe is "finally ready to rebound", driven by earnings growth of 30 and 20 per cent in 2021 and 2022, respectively.
Barclays is even more enthusiastic on the earnings front, forecasting in its 2021 outlook that European earnings will spike by as much as 45 per cent in 2021.
The road to normalisation is likely to be “bumpy” and bullish market expectations “raise the bar for positive surprises”, but favourable financial conditions, pent-up demand and ammunition from central banks and governments can sustain the recovery.
Safe havens are still crowded so there is room for further rotation into cyclical stocks.
“The unwind of the two-year-long flight to safety might just be starting,” says Barclays.
