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USA vs EU: how the markets compare
USA vs EU: how the markets compare
24 February 2023#WeeklyWatch

USA vs EU: how the markets compare

2023 has opened with a flurry of optimism, numerous positive signs coming from the U.S. and Europe.

A positive performance of 12.5 percent. This is the one put in place between January and the fourth week of February by European financial markets, which leaves no room for doubt: 2023 opened with a breath of optimism for stock exchanges characterized by well-hoped-for performance compared to 2022, a black year for finance that recorded the worst losses in decades on both equities and bonds in the wake of the exceptional concomitance of macroeconomic and geopolitical factors. 

At the moment, however, there continue to be several variables in financial markets that make it difficult to predict exactly what central bank choices will be for the coming months: how will the path of rate hikes that began last year evolve?

Corrado Cominotto, head of Banca Generali's Active Asset Management, draws attention to two factors: on the one hand, the level of inflation, which, after peaking at 9% in the U.S. last June, has fallen steadily in the months to follow to 6.4%. The second factor is unemployment at 3.4%, a level not reached in the U.S. since 1968. In addition to such a strong labor market, we are also seeing "an upward revision in gross domestic product growth," says Cominotto, who adds, "JP Morgan, for example, raised estimates for the U.S. to 1.6%, 1% for Europe and 2.3% globally" driven by Asia's growth expected at +4%.

Looking then at inflation trends, the work of central banks seems to have brought concrete results in countering rising prices. Despite such a sudden rise in the cost of money, however, there has been a tightness in the underlying economy that may lead bankers to maintain a restrictive stance for longer than expected.

Corporate profits and financial markets

Cominotto then emphasizes other factors: "At the microeconomic level," he says, "corporate profits are expected to grow moderately by 2023: by 1.5% globally, 1.6% in the U.S. and 0.7% in the Eurozone." Should the trends that have emerged in some indicators be confirmed (such as PMIs that came out above expectations), for Cominotto it is fair to expect these estimates to rise, albeit with marked differences between sector and sector. "By way of example, in the fourth quarter of 2022 earnings show an average rise of 2% in Europe, with energy stocks at +41%, due to the trend in oil prices. as a result of the war In Ukraine," continues the head of Banca Generali's Active Asset Management, pointing out that "in the United States growth is basically unchanged with a peak again in energy at +65%." 

"In this context we are looking with interest at the bond market," adds Cominotto, "particularly on corporate products that are returning to attractive yields for investors." Indeed, the default rate is currently close to 2 percent and is not expected to increase significantly should the current macroeconomic trend be confirmed. "We also look with interest at corporate financials," Cominotto continues, recalling that "banks have solid levels of capitalization (CET 1 Ratio at 14.8 percent and NPL ratio below 2 percent) and are already benefiting in terms of profitability from rising interest rates."  

Regarding the stock market, according to Banca Generali's head of Active Management, current valuations lean toward the Eurozone, which trades at a price-earnings ratio of 12.8 times (with Italy 8.8x) compared to the United States at 18.5x. Should central banks taper their hawkish stance over the coming months, the return of interest in growth stocks that has already been evident in recent months could be confirmed.

Corrado Cominotto, Head of Active Asset Management at Banca Generali Corrado Cominotto, Head of Active Asset Management at Banca Generali
At the microeconomic level, corporate profits are expected to grow moderately by 2023: by 1.5 percent globally, 1.6 percent in the U.S. and 0.7 percent in the Eurozone.