With Eu r opean stocks off to a strong start this year, investors across the pond may want to get some exposure to that market and capitalize on the trend. European equities held up better than many investors feared heading into 2023. While concerns of an energy crisis loomed over the region toward the tail end of last year, a milder winter, as well as an earlier-than-expected reopening in China, helped European equities outperform in this year’s first quarter. The Europe Stoxx 600 popped 7.7% in the first quarter, outpacing the S & P 500 ‘s 7% advance. That gain also built on the Stoxx 600’s 9.6% surge in the fourth quarter of 2022. Year to date, the European benchmark is up 8%. .STOXX YTD mountain Strong start to European stocks Despite this outperformance, the European index is also far cheaper than the S & P 500, trading at a forward multiple of 13, while the U.S. benchmark is trading at a forward price-to-earnings ratio of about 18. “Alpha opportunities have been improving since last summer, and particularly so in Europe compared to the US,” Lilia Peytavin, portfolio strategist at Goldman Sachs, said in a note this week. Of course, some market participants warn that the outperformance may not continue for much longer, saying a slowing macroeconomic outlook in the latter part of this year could hurt European equities. “The current momentum can continue for a bit further. And by a bit further, I mean into the earnings season and maybe into the beginning of the summer,” Barclays’ Julian Lafargue said. “But I do feel that as we move through 2023, and as economic activity is likely to slow down, this outperformance may fade.” Regardless, for those U.S. investors looking to take advantage of current valuations, here are some ways of finding alpha. Finding alpha after the banking crisis With Europe reeling from the collapse of Credit Suisse, the current investing backdrop is particularly advantageous for macro hedge funds, according to Goldman Sachs’ Peytavin. The portfolio strategist said she recommends picking stocks from health care and telecommunications companies, as well as personal and household goods firms. “They are micro sectors within which stocks do not move altogether in the same direction (low pairwise correlations) and also offer large performance spreads,” Peytavin wrote. One stock she highlighted was French satellite telecommunications company Eutelsat Communications , which the firm expects will more than double to its price target, as of March 31. The U.S. listed shares of Eutelsat are down about 2% this year. Meanwhile, she said the second-best sectors for stock pickers are food and beverages, chemicals and utilities. One food and beverage stock she identified as a buy is British multinational alcoholic beverage firm Diageo . The firm is a major distributor of Scotch whisky including Johnnie Walker, and its U.S.-listed shares are down more than 6% this year. As of March 31, Goldman Sachs expects the stock can rise 25%. An underappreciated tech market One corner of European markets that is more underappreciated could be the tech sector. Tech stocks make up a smaller portion of the European stock index – less than 8% in the Stoxx 600 compared to roughly 30% in the S & P 500. However, a search for higher-quality, higher-growth stocks could yield names that could outperform regardless of the macroeconomic backdrop. “They are often not necessarily as known as their US peers, but they’re equally essential to the overall ecosystem of the technology space,” Barclays’ Lafargue said. The strategist mentioned one firm that is the “market leader” when it comes to the machines used by semiconductor firms such as Intel and Taiwan Semiconductor to make their chips, though he declined to identify the firm. However, one such company is Dutch semiconductor supplier ASML Holding , which is also traded in the U.S. Consumer discretionary stocks One sector that is expected to play the reopening of the Chinese economy is the luxury sector. However, Lafargue warned that some European luxury companies may not rebound as much as investors may believe, as their sales remained more resilient during the pandemic. “Those companies tend to be highly profitable for the most part. They also tend to be highly cash generative, and they have proven their resilience over various market cycles, because these are aspirational goods or services that they provide,” Lafargue said. Separately, Goldman Sachs’ Peytavin identified autos, real estate, insurance and construction and materials as among the worst sectors for European stock pickers. “They are macro sectors, stocks, all moving together driven by the macro rather than stock idiosyncrasies, and offer a narrow performance spread,” Peytavin wrote. “Of course these sectors can still be useful to express a strong view on the macro environment.” While concerns of global growth loom over markets, there are opportunities to be had for investors who are looking for high quality companies that generate free cash flow, and trade at attractive valuations. “If you invest at the stock level, it’s always a good time to have some European exposure because you have great companies listed in Europe that should provide you with upside over the medium to long term,” Lafargue said. — CNBC’s Michael Bloom contributed to this report.
