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Last 12 months left the US economy and markets on a rocky road – and the coming 12 months guarantees to be a troublesome one as well. This has led some strategists to argue that 2023 could be the time when Europe will shine.
Zeynep Ozturk-Unlu, Deutsche Bank’s chief investment officer for EMEA, believes Europe could outperform each the economy and capital markets, with downside and recession fears becoming “more accelerated” in the US than in Europe.
This is despite Europe facing its own challenges, including the ongoing war in Ukraine, the energy crisis and inflation that has yet to peak – and is unlikely to satisfy the European Central Bank’s goal of 2% by mid-2024 at the earliest.
“Europe has been pursuing expansionary fiscal policies for a very long time, especially because of the energy crisis,” Squawk Box Europe told CNBC on Monday. “But beyond that… Europe can also be betting on China reopening and will provide a positive wind in Europe’s growth story.”
GDP growth in Europe last overtook the US in 2017, although final figures for 2022 have yet to be released.
Ozturk-Unlu pointed to the diversification of sectors in Europe in comparison with the US and the sustainable growth of production, especially in Germany and France, for instance of more stable economic growth in the region.
On equities, she continued: “It does not imply that Europe is totally resilient and in great shape, but in relative terms the shift from growth to [stocks] value, it actually gives a bit of more opportunity to Europe in comparison with the US”
So-called growth stocks — which include big US tech stocks — took a success in 2022 as the US Federal Reserve raised rates of interest, hitting expectations for future earnings. By comparison, value equities are inclined to outperform as prices rise, and Europe generally holds a better proportion of value equities than its global counterparts.
Since the starting of the 12 months Europe’s Stoxx 600 the index rose greater than 5% in comparison with a 3.4% increase in the US S&P 500.
Despite acting at its worst since 2018, European equities also outperformed US equities last 12 months, ending up 13% down in comparison with 19.4% for the S&P.
“There may be a chance resulting from the significant undervaluation of Europe in comparison with the US,” added Ozturk-Unlu. “Due to this fact, we imagine the world outside the US will outperform the US, and Europe in relative equity terms will outperform.”
Higher prospects, but risks remain
Deutsche Bank will not be alone in its more optimistic outlook for Europe.
Further policy tightening by the Fed, fiscal stimulus in the eurozone, the reopening of China, which is able to provide a lift to Europe in particular, and falling energy prices have been cited by strategists as explanation why the European economy could outperform in 2023.
And a few early data points look positive for the Eurozone versus the US
![Emerging markets are up 20% since October](https://image.cnbcfm.com/api/v1/image/107176673-16733709161673370914-27644413846-1080pnbcnews.jpg?v=1673372415&w=750&h=422&vtcrop=y)
Purchasing managers’ composite metrics – a closely watched measure of economic trends – fell to approx 4-month low of 45 for the US in December. In contrast, data from the euro zone increased to approx The best value in 5 months was 49.3a hair’s breadth away from the expansion’s territory count of 50.
Karsten Junius, chief economist at the Swiss bank J. Safra Sarasin, expects flat GDP growth in the euro area this 12 months, in comparison with a 0.5% drop in the US
Nonetheless, he doesn’t expect this to translate into higher performance on the stock markets. One of the reasons is the recent appreciation of the so-called eurowhich tends to take a three-month delay in wages, he told CNBC by email.
Many strategists have argued that while markets were driven by monetary policy in 2022, in 2023 they will probably be driven more by economic data and profits.
![Greek island helps Europe avoid energy crisis](https://image.cnbcfm.com/api/v1/image/107170698-Thumbnail_Digital_Originals_Europes_LNG_Clean.jpg?v=1672568941&w=750&h=422&vtcrop=y)
Amongst them is Joost van Leenders, senior investment strategist at Van Lanschot Kempen. Unlike Junius, he was more cautious about Europe’s higher economic performance, but said equities could surprise on the upside.
“If there may be a recession in Europe and the US, there have to be cuts in terms of weaker wages across the board – the US looks more advanced in that sense,” he told CNBC over the phone.
“But when the recession in Europe seems to be very shallow, then because Europe’s discount to the US is sort of as wide as ever, that could be the impetus to unlock that valuation discount,” he added, unless the Fed starts cutting rates of interest, increasing that is how US stocks grow.
Paul O’Connor, head of the multi-asset team at asset management firm Janus Henderson Investors, agreed that there have been “good reasons” to imagine that the era of higher performance in the US stock market had begun a reversal that could last into 2023 and later.
“While the higher performance of US equities following the global financial crisis was supported by higher earnings momentum in the US, this impact was amplified by the relative revaluation in favor of US equities. Each trends at the moment are reversing. While US stocks seem expensive in comparison with bonds and their very own history, stocks in most other markets look fairly priced,” he told CNBC.