5 minute read

The European Central Bank (ECB) has announced its first interest rate cut since 2019, marking an end to its hiking cycle. This move is set to breathe new life into stocks across the region – in fact, it seems like they’re already gaining momentum.

A mini renaissance for European equities

European stocks have received a welcome lift after a strong earnings season, narrowing the gap with their US counterparts. The STOXX 600, a broad index of European stocks, is up 8.6% year-to-date, while the S&P 500 has so far gained 10.5%.

Market sentiment has become rosier, and we’ve seen a surge of inflows into European stocks over the past few weeks. But that inflow of money has still mostly lagged behind the improvement in sentiment, both in size and speed.

It’s not a surprise that Europe has some catching up to do with investor sentiment. In recent years, it’s been the least favoured region for buy-and-hold funds for several reasons – the Ukraine war, the energy crisis, high inflation, high interest rates, and a run of lacklustre growth. 

Cumulative net inflows into the region have been close to zero since 2020 – the worst of any region. But now, with an anticipated turnaround in Europe’s economy, there’s a pickup in buying into sectors that tend to do well when the economy is thriving.

As an investor, what does this mean for me?

With the STOXX 600 now trading at a 13.5x forward price-to-earnings ratio (our Simply Finance section below breaks this down), the Eurozone is cheaper than most regions. That’s pretty attractive – if the bloc’s economy can recover and if it can keep its inflation in check. Time will tell whether those “ifs” materialise.

If you’re looking to invest globally, a portfolio that’s diversified across regions (our General Investing portfolios come to mind here) is usually the better bet.

This article was written in collaboration with Finimize.

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🎓 Simply Finance: Forward price-to-earnings ratio

The forward price-to-earnings (P/E) ratio is a way to value a company by comparing its current stock price to its earnings per share in the future, which can be estimated through financial analysis. A higher forward P/E ratio means investors are willing to pay more for its stock today, suggesting that they believe the company will grow quickly. Conversely, a lower forward P/E ratio indicates less confidence.

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