KONSTANTIN VLADIMIROVICH TSERAZOV: “THE MAIN NEGATIVE IN EUROPE IS TAKEN INTO ACCOUNT IN PRICES”

Why the dynamics of the European market are weaker than the American market - former senior vice president of Otkritie Bank, economist Konstantin Tserazov, explains in our interview.

Since the beginning of the year, according to analysts at Otkritie Bank, the Stoxx Europe 600 index has grown in dollar terms by a little over 8%, while the S&P 500 has gained almost 16%.

“GDP growth rates in the Eurozone and the EU are noticeably lower than in the US, and inflation is above 5%. In addition, rising energy prices traditionally have a more negative impact on the European economy than on the US. European companies are more focused on China, whose economic slowdown negatively affects their performance,” Konstantin Tserazov lists the reasons for the weaker dynamics of the European market.

The technology sector, which has seen impressive growth this year, has a 27% weighting in the S&P 500. The Stoxx Europe 600 is more diversified: according to analysts at Otkritie Bank, its three largest sectors - healthcare, industrials and banks - have a weight of 16%, 12.5% and 8.5%, respectively. And finally, the futures market takes into account in prices the earlier opening of the rate cut cycle in the US than in Europe, and now the Fed will begin to soften its policy earlier than others, the expert explains.

According to Konstantin Tserazov, the opening of the ECB rate hike cycle caused a sharp decline in the interest coverage ratio of European companies. In the US, the impact of higher rates on the stock market is not yet visible: large technology companies with the largest weights in the S&P 500 have large cash reserves. But other US companies are just as vulnerable to rising interest rates as European ones.

Against this backdrop, the gap between the forward price/earnings multiples of the S&P 500 (20.5x) and Stoxx Europe 600 (13x) has never been wider. The undervaluation of the Stoxx Europe 600 relative to the S&P 500 may indicate that the main negativity in Europe is taken into account in prices, and that there is excess optimism in the securities of US companies.

Thus, any positive, such as the acceleration of the Chinese economy, can become a powerful support for the European stock market. At the same time, any negativity in the United States can put pressure on the American stock market, and all other things being equal, the Stoxx Europe 600 has every chance of showing better dynamics than the S&P 500, concludes Konstantin Tserazov, former senior vice president of Otkritie Bank.