Photographer: Tiffany Hagler-Geard / Bloomberg
Photographer: Tiffany Hagler-Geard / Bloomberg
The almost unbroken accumulation in European stocks and bonds over the past year has pushed valuation measures to freezing levels, setting the platform for a possible pullback while as Europe struggles with the spread of vaccines that could hamper the region ‘s economic recovery.
With Europe’s equity benchmark trading at near-high valuation, the word “bubble” is creeping into analysts’ notes, following sharp gains with unseen stimulus measures. never before from central banks and governments fighting the economic impact of the pandemic.
As product-hungry investors continue to accumulate into risky assets, a number of strategists warn of a growing disconnect between price and reality. economic in different market corners, from Europe’s renewable energy sectors to investment-grade corporate bonds.
“Market shares have moved well above fair value,” said Kasper Elmgreen, head of equity at Amundi. “Gravity is a powerful force, where bubbles build up they will eventually be at whatever level high values can be before this happens.”
The Stoxx Europe 600 Index – which just recorded its best weekly gain since mid-November, up 3.5% – trades at 17 hours of earnings onwards, well above the 10-year average of about 14 hours. In early January, about 90% of Stoxx 600 were trading above their 200-day moving average, the highest number since 2017, close to a level that became a technical selling point in the past gone.
The markets received their latest boost after day traders boosted momentum, followed by a rapid decline, in shares of companies such as Gamestop Corp. and Nokia Oyj as short sellers rushed to release a negative bet. While the brawl between the retail traders and hedge funds has subsided, many analysts and investors see it as a sign that the market is growing too hot.
“Increased sales participation in equity markets is a typical side effect of bull markets and bull markets going over bubbles,” said Lars Kreckel, global equities strategy at Legal & General Investment Management.
Another worrying move is the improved performance since October from European companies with weaker balance sheets. That wonder, like the day-to-day trading drama, is an act of cheap money that forces investors to take risks, and is “a symbol of a highly volatile and speculative market,” said Suzanne Hutchins, folder manager at Newton Investment Management.
“Markets are volatile and the handling by central banks of tight interest rates poses many unforeseen risks,” she said.
While European stocks are not yet near higher valuation levels than can be seen on Wall Street, there is one section on astronomical upliftment: renewables. Even after the recent pullback, the Indxx Renewable Energy Index trades at a 40-hour gain, twice the MSCI Global Index.
Bank of America Corp. strategists said. ETF net energy flows create potential bubbles in stocks such as EDP Renovaveis SA, Orsted AS and Verbund AG. The fourth quarter accumulation of more than 40% in these European facilities coincided with a fourfold increase in flows to iShares Global Clean Energy ETF.
In terms of measures such as movement, valuation and growth multiples, clean energy sectors are “certainly not cheap and in many cases look very long,” said Stuart Joyner, an analyst at Redburn.
Read more: Dot-com Era stock values frighten ESG funds to ESG funds
There have been similar concerns about the high prices of high-end corporate bonds. The rally in the credit market, which began in March last year, is backed by a central bank stop in Europe. Investors see little reason to invest in company debt, and analysts are urging them to stop buying again until prices fall.
“It seems like a peak has been reached,” said Sebastien Barthelemi, head of credit research at Kepler Cheuvreux SA.
High-level euro corporate bonds are up around 0.3%, while junk-rated euro bonds have followed a similar path this year, leading asset managers towards more risky assets such as equities in search of results.
“Former investors in direct investment will not be able to survive on the results they are getting,” said Jeremy Ghose, head of the credit regulation industry at Investcorp. “You really are getting nuts today. ”
However, for all the talk of expensive valuations, a fall in corporate bond prices has not yet materialized as credit care managers maintain. using money and the European Central Bank buys debt under its QE programs. “It looks strange to see all this frenzy in new cases but a product analysis is affecting investors,” Barthelemi said.
This has allowed the return risky contracts in the market at a waste rate, such as pay-as-you-go notes, deep bonds in the waste sector and companies issuing direct debt to finance shares.
And in the equities market, the recent run in rations could be “pre-prices of the strong growth conditions that are likely to occur this year,” according to Sebastian Raedler, a strategist at Bank of America.
Nonetheless, issues like Gamestop are going to raise questions about the health of the market in general.
“There are growing concerns that financial markets have burst into bubble land over the past few weeks,” said Frederique Carrier, head of investment strategy at RBC Wealth Management, he wrote in a note. “Cases of over-conduct in markets have come to light, and, it seems, more often.”
– Supported by Laura Benitez, and Sam Unsted
(Updates to redesign, add Stoxx 600 weekly performance in 5th paragraph)