In light of the continuing discussion about the relative value of U.S. equities, global hedge funds have been increasing their holdings of European companies and decreasing their holdings of North American ones, according to proprietary data compiled by Morgan Stanley.
The S&P 500 (.SPX) increased 9.6 percent this year, while Europe's STOXX 600 (.STOXX) increased 6.5 percent. The S&P experienced a 24% rally last year, which was twice as high as the STOXX performance. According to data provided by BofA Securities, the spread between the S&P 500 and European stocks is 14 times and 21 times, respectively, for future earnings forecasts.
Hedge funds "have bought EU equities in nearly 70% of the trading sessions since the Euro STOXX 600 began its rally in mid-January," according to Morgan Stanley. The acquisitions have increased the European exposure of hedge funds' portfolios from less than 17% at the end of 2023 to about 19%.
Investors are primarily adding long positions to Europe, believing that equities would rise, according to Morgan Stanley. Information technology services, industrial conglomerates, electrical equipment, semi-conductors, and life science instruments and services are some of their preferred sectors on the continent.
Morgan Stanley monitors its clients' cash flow to reveal patterns; it is one of the largest prime brokerages in the world that serves hedge funds. U.S. stocks are supposedly selling at large premiums to global equities, according to several market participants.
Morgan Stanley's stock strategist Michael Wilson has stated that improved profit expectations for the current and following years are crucial to the further multiple expansions in U.S. equities. "We think this rally has been mostly about looser financial conditions and falling cost of capital as a result of the Fed's 4Q dovish shift," according to him.
U.S. stocks may not be as pricey as their European counterparts, according to BofA Securities' strategists. They noted in a note that the S&P 500's composition—which is more dependent on the thriving IT sector—is mostly responsible for the premium.
Both the economic prognosis for the two areas and the lower volatility of U.S. earnings help to explain the higher multiples of stocks, according to BofA. As the gap between the two is at its widest point in history, the portfolio strategy team at Goldman Sachs thinks "Europe has room to catch up with the U.S.," as stated in a note.
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