European equities logged another month of positive equity returns. Stronger economic data and anticipation of epidemic effects wearing off supported local equity performance. While returns in the local currency were rather tame, the surge of the Euro against the greenback was north of 2%, the European STOXX 600 index gained 1.81% (4.21% in US$ terms) over the month.
Fundamentals wise, Europe continues to post positive figures. Data ranging from various PMIs to consumer confidence all showed continued positive developments, these data further supplement the rhetoric of recovery in the physical economy. With the gradual reopening under way, consumption is expected to recover to pre-pandemic levels. Cyclicals such as materials, industrials, and consumer discretionary, key heavyweights in the European market, would likely benefit more from the consumption boom.
However, we can expect a cap on the further upside in the European equity market due to their heavier cyclical weighing. As we have mentioned previously, overweighting in European markets is intended as a short term tactical allocation. Henceforth, we remain positive on Europe for 2021 Q2, as authorities expect to achieve a 70% vaccination ratio by the end of Q2, which is the ‘herd immunity level’, the positive sentiment arising from the recovery would likely drive the stock market. We expect there to be limited further upside once the recovery is completely priced in, by then we might review the overweight suggestion.
