The growing herd of European stock bulls can add the rising euro to their case. March is headed to be the first month in a year with both the Euro Stoxx 50 Index and the single currency gaining at least 1 percent, with their 20-day correlation reaching the highest since October. Since 2014, the two had moved mostly in opposite directions, as the falling exchange rate boosted the overseas earnings of global giants on the blue-chip gauge. At the end of the day, valuation is what it is all about.
Valuation for earnings this year is about 15.8 times earnings, for the U.S. it is about 18.3 times earnings for the S and P 500. So Europe is definitely attractive to U.S. investors. Investors are looking what is available to them and what is the best option. We are still in the early stages, as more and more money will move to Europe leaving the U.S. and looking for better valuation opportunities.
The return to a positive correlation is a sign investors are becoming more confident in the fundamentals of European stocks, making the stronger euro less important, according to Morgan Stanley. Banks such as Deutsche Bank AG and Julius Baer Group Ltd. have turned overweight on European equities recently as economic data improved and polls signaled a diminished likelihood of the anti-European Union candidate Marine Le Pen winning the French presidential election.
“Normally equity markets move in inverse relationship with the currency market in local-currency terms, so when you’re seeing both rally at the same time it generally tells you the underlying fundamentals are strengthening,” said Graham Secker, an equity strategist at Morgan Stanley in London. “Stronger growth means your currency is not as important as it was before, so it could be quite a constructive sign that we’re seeing that happen.”
Another reason this could be happening is more foreign investors are repatriating funds to buy European stocks, said Michael Shaoul, chief executive officer at Marketfield Asset Management in New York. The U.S.-listed iShares MSCI Eurozone ETF, the largest of its kind tracking euro-area shares, last week saw its largest inflows since the 2016 Brexit vote.
