Investors are turning somewhat more positive on Europe, spurring a recovery in the region’s beaten-down stocks.
As of Tuesday’s close, the benchmark Euro Stoxx 50 index had gained 18.6% this quarter, putting it on track for the best quarterly performance since 2009. The rise for the index, which includes eurozone blue chips like
L’Oréal SA
and
LVMH Moët Hennessy Louis Vuitton SE,
compares with a 9.9% gain for the S&P 500.
The mood has brightened after a period of extreme pessimism about Europe, brought on by the invasion of Ukraine, a subsequent jump in energy prices and the highest inflation in decades. Russia was the biggest energy supplier to the European Union, rendering the region vulnerable to shocks from Western sanctions.
Market sentiment is being lifted by early signs of inflation easing in the eurozone and hopes that the scramble for alternatives to Russian natural gas has reduced the risk of an energy crisis this winter, investors and analysts said. Meanwhile, benchmark U.S. yields and the dollar have declined in recent weeks, helping lift riskier assets worldwide, as investors anticipate a slowdown in the Federal Reserve’s campaign to raise interest rates.
“We’re in a recovery trade. There’s still going to be a recession. But what we’re seeing is signs that the recession won’t be as bad and that inflation might calm down more quickly than people thought,” said
Jordan Rochester,
a currency strategist at
Foreign investors have snapped up European assets. In a marker of that international appetite, flows into exchange-traded funds holding eurozone-based stocks, but which are denominated in other currencies, rose to the highest monthly level since early 2021 last month, Nomura analysis showed.
The annual eurozone inflation rate declined in November for the first time since mid-2021, falling to 10%, from 10.6% in October. A pullback in oil and other energy prices helped. Natural-gas prices have stabilized as Europe’s gas storage has risen above 95% due to imports of liquefied-natural gas, reducing the risk of an energy crunch.
Investors now expect the European Central Bank’s key policy rate to reach 2.8% next summer, market prices suggest, down from forecasts of more than 3% a month ago.
As in the U.S., where consumer-price inflation has also eased, investors are hoping that central bankers won’t have to tighten financial conditions so aggressively that they trigger a deep recession. In turn, expectations of a milder downturn and cheaper capital available to companies are boosting European stock and bond markets.
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“The Fed and the ECB are winning the war against inflation, and at some point, we’re going to see a pause from the central banks. This is something that will drive the market higher,” said Roland Kaloyan, head of European equity strategy at
Some of the best-performing stocks in Europe this quarter are in the industrial sector. These companies were among the hardest-hit by the disruptions to gas supplies and jump in energy prices, with many companies temporarily shutting factories or reducing production.
Shares in France’s
Alstom SA
are up 43% this quarter, while those in Siemens Energy AG of Germany have risen 42%.
Some analysts expect other energy-intensive sectors to benefit from cheaper energy and the recent loosening of Covid-19 restrictions in China, one of the EU’s biggest trading partners.
“One of the sectors in which I see a lot of upside potential in Europe is the automobile sector,” Mr. Kayolan said. He expects supply-chain conditions to keep improving. Europe’s major car makers include
Volkswagen AG
and
NV.
Conditions in the credit markets have also improved, with a decline in spreads, or the extra yields compared with a benchmark that investors demand to hold riskier bonds.
The spread on an ICE
index of bonds in euros issued by industrial companies narrowed to 1.6 percentage points above a benchmark. That is down from 2.1 points at the end of September, but still above the average 1.1 percentage point over the past 10 years.
Some remain cautious about the region’s prospects, for example if the Russia-Ukraine war drives more volatility in energy prices and inflation.
“The rally that we have seen was followed by the optimistic view that the energy crunch might not be as bad as we feared,” said Antonio Cavarero, head of investments at Generali Insurance Asset Management. “But Europe is still very much exposed.”
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com
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