European equities and the euro look set to lose out to U.S. markets in the months ahead, as a stellar run in early 2023 has fizzled out in the face of tepid global economic performance and the AI hype that has brought a sparkle to Wall Street.
“Relative to the U.S., European equities are looking less interesting and attractive,” said Bernie Ahkong, co-chief investment officer at fund manager UBS O’Connor Global Multi-strategy Alpha. Allocation to technology stocks was little changed in June but, at net 16% overweight, investor positioning was at its highest since December 2021.
An equal-weighted version of the S&P 500, which dilutes the impact of the large-cap tech stocks, is up just under 4% in 2023.Part of the European market’s outperformance earlier this year was down to low expectations. European shares traded at their biggest discount to U.S. peers on record last September. But that valuation gap narrowed when natural gas prices fell in January, eliminating much of the concern around the economic outlook for Europe.
“That has started to shift in the last one or two months, as sentiment around China has got weaker again,” he said, also pointing to the outperformance of tech stocks and European macro data rolling over.