European Stocks 'Picked' by Big Players

Europe Stock Market Hits Record High This Year
Despite This, Long Positions Expand
Short Selling Ratio Lowest in 10 Years
Leading Price-to-Earnings Ratio Lower Than US

Lagarde, President of the European Central Bank
[Photo by Yonhap News]

As European stock markets continue to hit record highs this year, global major investors are expanding their long (buy) positions. This indicates their expectation for further upside potential rather than a correction in European markets.

According to Investing.com on the 1st (local time), the pan-European benchmark index Euro Stoxx 600 has risen about 7% since the first trading day of the year. The index surpassed 500 on the 7th of last month, continuously setting new highs. Germany's DAX index, representing Europe's largest economy, also jumped about 10% during the same period, led by rallies in IT, semiconductors, luxury goods, and obesity treatment stocks.

For example, the stock prices of SAP, Germany's largest software company by market capitalization, and ASML, a key semiconductor equipment maker based in the Netherlands, surged 31% and 34% respectively this year. During the same period, shares of French luxury goods company Louis Vuitton Moet Hennessy (LVMH) and Danish obesity treatment drug maker Novo Nordisk, which caused a global sensation with its Wegovy product, rose 15% and 26% respectively.

Global major investors are betting that European stock markets will maintain their upward trend for the time being. Bloomberg also analyzed that "April has historically been the strongest month for gains in the Euro Stoxx 600 index."

According to Goldman Sachs, the hedge fund exposure to European stocks relative to the global index compiled by Morgan Stanley Capital International (MSCI) recently reached an all-time high of 5.8%. Bank of America (BoA) revealed in a recent regular fund manager survey that "the allocation of global mutual funds to European stocks was the highest since June 2020."

On the other hand, the proportion of short (sell) positions was the lowest in 10 years. According to S&P Global, the short-selling ratio on European stocks at the end of last month fell below 0.2%, the lowest since 2014 (0.2%). Karim Chedid, a strategist for Blackstone’s iShares team covering Europe, the Middle East, and Africa, explained, "There is a visible flow of investment funds into Europe."

Recently, some have diagnosed that the U.S. stock market, the epicenter of the artificial intelligence (AI) boom led by Nvidia, is overheated. In contrast, European markets are considered to have remaining upside potential. In fact, the 12-month forward price-to-earnings ratio (PER) of the Euro Stoxx 600 is 14 times, which is relatively lower than the U.S. S&P 500 index.

Expectations that the European Central Bank (ECB) will cut its benchmark interest rate this year are also supporting the bullish outlook. The Eurozone's consumer price index (CPI) in February rose by only 2.6% year-on-year. This slowdown trend has continued from 2.9% in December last year and 2.8% in January this year.

The investment industry suggests that the valuation of European cyclical stocks could recover. In a recent investment memo, Citigroup set the year-end target for the Euro Stoxx 600 index at 540, the highest among Wall Street opinions. Peter Oppenheimer, head of European macroeconomic research at Goldman Sachs, said, "If (Eurozone) interest rates decline and a soft landing is achieved, there will be an opportunity for the market to expand in cyclical areas."

This content was produced with the assistance of AI translation services.