By Tommy Stubbington and Josie Cox
After a blockbuster quarter for European stock markets,
investors are betting there could be more to come.
Tentative signs that the ailing eurozone economy is turning a
corner have coincided with the launch of the European Central
Bank's bond-buying stimulus program--known as quantitative
easing--which has pushed billions of euros into equity markets.
The Euro Stoxx 50--an index of blue-chip stocks inside the
single-currency bloc--has surged more than 18% in the first three
months of the year to Tuesday's close. Germany's DAX index climbed
more than 22%, its best quarter since 2003. France's CAC 40 enjoyed
its strongest three-month run since 2009, rising 19%.
"For Europe, it's been the best of all worlds. The economy has
improved at a time when people were too pessimistic, the oil price
has supported that recovery, and then along comes QE," said
François Savary, who oversees about $10 billion of assets as chief
investment officer at Swiss bank Reyl.
The only dark spot has been Greece, where a showdown between the
new government and international creditors has rattled investors'
nerves, pushing Athens's main index down 6%.
Despite the scale of the rise in most of Europe--which puts a 1%
quarterly gain for the U.S.'s S&P 500 firmly in the
shade--there is little sign that investors' enthusiasm is
waning.
More than half of 908 investors surveyed by Barclays in March
said they expect Europe excluding the U.K. to outperform all other
regions around the world in the next three months.
"Markets have been running up quite dramatically, but we think
that's down to a fundamental improvement in the economy," said Mads
Pedersen, head of discretionary asset allocation for UBS Wealth
Management, which oversees about $2 trillion of assets.
Private-sector activity in the eurozone grew at the fastest pace
in March since May 2011, data showed last week, bolstering a recent
upturn in surveys of business confidence.
After several years of no earnings growth, Mr. Pedersen thinks
eurozone companies can boost profits by more than 10% this year.
This month, UBS Wealth raised its allocation to eurozone
equities--already its favorite region globally--after a
sharper-than-expected fall in the euro this year further brightened
earnings prospects. A weaker currency is good news for exporters
and multinationals that get a big chunk of their revenues
abroad.
The rapid decline of the single currency, which has slipped more
than 11% against the dollar this year, is down to the ECB. The
central bank this month kicked off a long-awaited program of
quantitative easing, printing EUR60 billion ($65 billion) every
month to buy bonds. The aim is to push investors into riskier
assets like stocks, as well as weaken the currency, in a bid to
stimulate the economy. The early signs are promising.
Bondholders have seen the value of their investments rise
rapidly. But new investors face tiny returns now that the ECB has
pumped prices up so high. That has sent many private investors into
stocks. According to Bank of America Merrill Lynch data, $46.6
billion has flowed into eurozone stock funds so far this year,
while $44 billion has left U.S. stock funds.
"This has been an exceptional start to the year for European
equities and we're increasingly seeing investors from other asset
classes, like fixed income, coming into stocks," said Nick Lawson,
a senior equities trader at Deutsche Bank.
The stellar run for Europe's bourses marks a turnaround from the
second half of 2014. Then, a slowdown in the economy, as the
conflict in Ukraine threatened to weigh down the region's
prospects, saw many international investors turn cold on Europe.
Now, the greatest weakness of European stocks could lie in their
sheer popularity.
A survey carried out by Bank of America Merrill Lynch in March
showed bullishness in "uncharted territory" with divergence between
U.S. and European stock allocations at its widest since 2007. That
means any reversal of fortunes could see a sharp pullback in
European stocks as investors throw in the towel.
"There's certainly the risk of some short-term consolidation,"
said Reyl's Mr. Savary.
But for now, most are happy to stick with Europe's soaring
equity markets.
"Whether the rally is sustainable in the long run is going to be
dependent on whether the weak euro can convincingly translate into
a recovery in earnings," said Philip Lawlor, a partner at
London-based Smith & Williamson Investment Management LLP,
which manages about GBP15 billion ($22 billion) in assets.
"So far we haven't seen it, but as an optimist, I think it is
probably a question of time," he said.
Write to Tommy Stubbington at tommy.stubbington@wsj.com and
Josie Cox at josie.cox@wsj.com