Cooped up over Covid? No more. Americans are cramming onto planes and saying sayonara to Sarasota and Savannah and hello to Hamburg and Helsinki.
After “three summers where Americans vacationed domestically, we observe that they are heading internationally this summer,” Truist analyst Patrick Scholes recently said. Travel insurer Allianz Partners predicted in May that the number of Americans traveling to Europe this summer would increase 55% over last summer. And U.S.-based operators of tours to Europe are reporting robust demand.
This burst of trips to Europe should help stocks of companies involved in travel and hospitality. However, even if these tailwinds are already reflected by investors, European stocks as a whole beckon with très cheap valuations.
With the Stoxx Europe 600 index trading at a 36% discount to the S&P 500, based on 12-month forward price-to-earnings ratios, “heavily discounted” European stocks have never been cheaper when compared with their U.S. peers, according to Citigroup strategists. They upgraded the continent’s shares Monday to overweight while lowering their rating on U.S. stocks to neutral.
The Citigroup strategists expect a weaker dollar and any stimulus from China to help European stocks and say that investors in U.S. stocks, who have enjoyed healthy gains this year, should exercise caution. The Stoxx Europe 600 is up 6.9% year to date while the S&P 500 has risen 16.8%.
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“Our U.S. strategy team thinks megacap growth is set for a pullback, while U.S. recession risks could still bite,” wrote Citi’s U.S. equity strategist Scott Chronert in a note.
The argument for international stocks may understandably elicit skepticism. After all, U.S. stocks have easily outpaced international equities since 2010.
However, “non-U.S. stocks have outpaced U.S. stocks for extended periods in the past, such as the mid-1980s and from the late 1990s into the mid-2000s,” writes Morningstar, which dug deep to explore the sharp divergence in performance.
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Although Morningstar stops short of making an outright prediction that non-U.S. stocks will resume leadership, it says improving fundamentals and corporate governance could act as catalysts for those stocks to outperform. “But perhaps the strongest rationale is the market’s most pervasive phenomenon: mean reversion,” the firm writes.
Investors can gain broad exposure to European stocks through popular low-cost ETFs, including the
(ticker: VGK) and
(IEUR). Both were 2% higher Wednesday after the U.S. government released June consumer price index data pointing to a further slowdown of inflation.
Write to Greg Bartalos at [email protected]
