Tide turning in favour of Europe stocks after years of underperformance

After years of underperformance, European stocks look ripe for a catch-up rally with Wall Street as the European Central Bank is about to embark on a bond-buying programme to kick-start the euro zone economy. On the eve of the ECB's policy meeting at which the bank is seen unveiling a quantitative easing programme, European stocks trade at relative multi-year lows versus US stocks, and many analysts expect the gap to start closing as investment flows return to Europe.
"Europe is where the US was in 2009," said Alain Bokobza, head of strategy, global asset allocation at Societe Generale. "Now, with a currency falling to $1.15 from $1.55 and the injection of (a possible) 1 trillion euros, I don't see how the euro zone economy won't recover." SocGen sees euro zone equities outperforming US stocks this year, as the euro hitting a 12-year low is set to revive Europe's stalled earnings.
J.P. Morgan strategists also see European equities poised to catch up with US stocks, highlighting signs that Wall Street is about to lose steam after tripling in value since 2009. "(The) Fed's liquidity support is finished. Profit margins are at record highs. In contrast, we think that euro zone now offers a better risk-reward: activity appears to be bottoming out just as ECB is about to act more aggressively, and the benefits of weaker Euro are coming," they wrote in a note.
European stocks, still reeling from a prolonged sovereign debt crisis, have underperformed US stocks in the last few years. While Wall Street's benchmarks trade at record highs, the euro zone's bluechip Euro STOXX 50 still needs to rally 40 percent to reach 2007 peaks. In terms of relative price performance, euro zone stocks trade at a 50-year lows versus US stocks, according to Bank of America-Merrill Lynch.
When factoring in earnings, European stocks also look cheap, with Europe trading at the lowest price-to-earnings ratio to the US market in 2-1/2 years, Thomson Reuters Datastream figures show. "We could easily see a 10 percentage point outperformance of Europe this year. The region is back in vogue," Saxo Bank trader Pierre Martin said. European stocks are also set to enjoy a steady wave on investment infows, as global asset managers increase their exposure to the region. Pimco, one of the world's biggest fund managers with $1.68 trillion in assets under management, said on Tuesday it has placed an 'overweight' position on global equities, particularly European stocks.