(Bloomberg) – The European vaccination campaign may be plagued by delays, communication errors and missteps, but in the markets at least, investors are united in betting the pandemic is on the way out.
Stocks in the region are back to record highs, and the euro topped its best week against the dollar so far this year. A significant turnaround in projected profits for European companies shows a brewing recovery in the investment and consumption cycle.
Analysts are raising estimates for European miners, banks, automakers and oil producers – all industries are poised to explode as the global economy recovers. According to data from Citigroup Inc., upgrades now outnumber downgrades in over a decade.
Whether all of this enthusiasm is justified will become clearer this month, when the results season kicks off. Behind the bullish turn of the markets lies the conviction that Europe will succeed in immunizing the majority of its population within a few months, and the proof that the United States and Asia are on a solid road of recovery.
From food giant Nestlé SA to luxury powerhouse LVMH Moet Hennessy Louis Vuitton SE, investors are counting on Europe’s leading names to reap windfall profits as consumers around the world emerge from lockout ready to spend.
“The market rightly anticipates accelerating earnings growth,” said Olga Bitel, global strategist at William Blair Investment Management. “The difference this time is the magnitude. Specifically, the United States and Europe are likely to experience the mother of all recoveries over the next several years. “
Gains in European markets show sentiment is turning positive after delayed start of vaccinations and mistrust of side effects from AstraZeneca Plc vaccine. Now there are signs that the European vaccination campaign may get back on track.
France has reached its goal of vaccinating 10 million people a week earlier than planned and Germany has doubled its vaccination rate. Germany’s export-driven economy is also boosted by the broader economic recovery, helping to raise inflation expectations. The country’s 10-year break-even rate is 1.35%, near the highest since 2014.
Certainly, the European markets still seem to be asleep compared to elsewhere. The euro is not far from its five-month low against the dollar, and there is no sign of a speculative frenzy in stocks. Instead, the investment case for Europe is often that of valuation discounts.
The region has been battered so badly, whether through the pandemic, bureaucratic internal struggles, vaccination delays or budget cuts, it doesn’t take much to trigger a turnaround. And at a time when China and the United States are booming, the bulls believe Europe can take advantage of the momentum as well.
To bet on the history of the comeback, the equity derivatives team at JPMorgan Chase & Co. told clients to buy calls on the Euro Stoxx 50 and sell them on the S&P 500. Bank strategists tout Europe’s cyclical trend and relative cheapness as any reason stocks can continue to outperform.
Despite this optimism, there is ample evidence that Europe’s recovery is still on shaky ground. Concern over rare blood clots associated with AstraZeneca injection has hampered vaccination efforts. There are also growing concerns about a potentially long delay before money from the European recovery fund of 750 billion euros ($ 892 billion) reaches countries affected by the crisis.
For now, all eyes are on consumer spending. In the UK, shops, gyms and hairdressers will reopen on Monday, and the summer months will be a litmus test if shoppers are ready to splash out on vacation and new clothes.
Airlines and mall owners have already flown away from investors betting that normal life can return quickly. The bonds of EasyJet Plc and UK property manager Hammerson Plc are among the best performing in Europe this year.
Bond investors are already betting on a return to normal life
“As long as vaccine deployment continues to progress, we would expect consumers to start spending,” said Niall Gallagher, director of European equity investments at GAM.
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