Fixed-income salesmen from a previous era used to rely on a safe but sound principle when hawking their products to investors. Bland is good. But boring is better.
Clipping coupons, collecting interest, and enjoying predictable returns was pitched as a far better option than riding the day-to-day vagaries of the stock market.
Global investors are now starting to separate at least some of their allocations into the world’s two biggest markets—the U.S. and Europe—based on similar thinking. It could almost be argued that investors are seeing European investments acting like bond returns, and U.S. allocations bouncing around like stocks, thanks in part to shifting tariff headlines and the administration’s tax and spending policies.
An EU official touched on that very theme Friday during a briefing with reporters in Brussels about nascent U.S. trade talks.
“This is the watchword: uncertainty. It is impossible to know what the status of the tariffs will be next week, not to mention next month,” Reuters quoted the EU official as having said. “If you want sane, stable, even boring, rules-based order and predictable business environment, Europe is the place for you.”
There’s at least a kernel of truth to that.
Europe’s Stoxx 600, the region’s broadest benchmark, has outperformed the S&P 500 by more than 7.5% this year. That is despite having no megacap tech names and working against a backdrop of sclerotic economic growth. It’s also reversing a two-decade trend starting in the mid-2000s during which European equities fell 60% relative to their U.S. peers, according to Bank of America.
The bank’s closely-tracked “Flow Show” report, published Friday, also notes that while U.S. equity funds have seen outflows of around $5.1 billion over the past two weeks, Europe-based funds drew in $1 billion over the past seven weeks. The inflow, small in comparison to U.S. funds, is nonetheless a larger portion of the Stoxx 600’s $14 trillion market cap. The S&P 500, by contrast, is more than three times larger at $47.6 trillion
In U.S. dollar terms, Bank of America data show European equities with a return of 22% this year, ranking just shy of the 25% return for gold, which tops its table of global asset performance. U.S. equities, by contrast, have returned -0.1%.
The report also suggests that divergence could continue, given the weakness in the U.S. dollar and policies from the Trump administration that are likely to extend the greenback’s decline against its largest global peers.
The daily uncertainty on tariffs, exemplified by the U.S. Court of International Trade ruling that most of the president’s levies are illegal and the subsequent stay on that ruling granted by a federal appeals court, isn’t helping.
“While this might be just the beginning of yet another chapter in the U.S. trade policy, the turbulence is further chipping away at confidence in the broader U.S. economic outlook,” said Kevin Ford, FX and macro strategist at payments platform group Convera. “Positioning remains bearish on the dollar over the next three months.”
With first-quarter earnings effectively over, headline risks over the coming weeks will be largely focused on tariff developments, economic growth, and inflation pressures. All of them are likely to trigger fresh rounds of market volatility and test investors’ patience heading into the back half of the year.
Over the longer term, according to recent data from Vanguard, U.S. stocks are expected to underperform their international peers as well. The group sees domestic equities returning between 4.3% and 6.3% over the next 10 years, compared with 6% and 8% for a basket of global equities.
Europe’s challenges are myriad, of course, and its slow growth, Byzantine regulations, and disparate collection of 27 different economies make it far less efficient than it could otherwise be.
But with U.S. markets captured by tariff risks, bloated government budgets, and a dollar in deep decline, Europe’s predictability is paying off.
Write to Martin Baccardax at martin.baccardax@barrons.com
