Since the start of this year, we’ve held a keen eye on European stocks—in fact, they’ve outperformed the U.S. over the last three months.

Then Credit Suisse stress erupted, and naturally, investors started wondering: Is there still value in Europe over the next year? In our view, yes, and here are three reasons why:

1. Greener growth pastures

In Europe, better energy dynamics this winter delivered a critical boost to its economy. Moreover, the issues with Credit Suisse look idiosyncratic, with banks in the region generally on sound footing. Deposit bases are more retail-based (i.e., stickier) than their U.S. counterparts. More stringent regulations enacted in the wake of the financial crisis and eurozone sovereign debt crisis strengthened capitalization. And finally, European banks’ securities portfolios tend to be smaller than their U.S. peers. For instance, bond portfolios (which are particularly sensitive to rising interest rates) make up just 20% of deposits for European banks (compared to 35% for big U.S. banks).

2. Stronger corporate earnings

Better growth will likely boost sales for European companies, leading to higher corporate profits.

In Europe, corporate profits have already moved higher. Many banks reported strong earnings last quarter, boosted by higher interest rates after over a decade of negative interest rates. Lower gas prices bolstered industrial companies, energy companies are increasing their capital spending, and luxury brands seem to be chugging along (with some welcome support from China’s economic re-opening).

3. Less expensive than U.S. stocks

European stocks have both sold off in recent weeks and offer a potentially attractive entry point. For instance, the Stoxx Europe 600 (which can be thought of as the S&P 500 of Europe) is trading at an approximately 30% discount to the S&P 500—back to Great Financial Crisis levels and far wider than the long-term average.

So, when considering what investments to make in today’s environment, pay close attention to your potential home bias. There may be compelling opportunities around the world that could provide prudent diversification benefits in portfolios.

Infographic describes six countries and the % of the equity market owned by domestic investors vs. the MSCI All Country World Index weight.

All market data from Bloomberg Finance L.P., 3/29/23

IMPORTANT INFORMATION

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Diversification does not ensure a profit or protect against loss.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

STOXX Europe 600 Index (SXXP Index): An index tracking 600 publicly traded companies based in one of 18 EU countries. The index includes small cap, medium cap, and large cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

Standard and Poor’s 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS information technology sector.

The Nasdaq-100 is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The stocks' weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components.

Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.

All market and economic data as of March 2023 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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