As we head into the U.S. Presidential election in November and with the summer months ahead, the chances are that the financial markets will only consolidate levels moving forward. With little or no progress on the coronavirus battlefield, investors will have a hard time finding good risk-reward opportunities during the summer.
If history tells us something, U.S. equities tend to see worse-than-average performances before U.S. elections. With investors unwilling to take a risk ahead of the election date, European equities provide an opportunity given the dynamics in the region.
Hawkish Developments in Europe Favor Investments in European Assets
The European equity markets registered a strong comeback since the start of the COVID-19 pandemic. After dipping below the 8,000 level, the Dax in Germany is back above 12,000 and threatening to break the highest level since 2019.
The recent developments in the European Union were mainly the reason behind the stock market’s performance. While it did follow the US equity markets higher, the European market benefited from a joint and quick reaction from the ECB and national governments. Since the health crisis started, the European Union sent some strong messages of fiscal integration, something that was missing before.
After it signaled the issuance of common debt, the stock market and the Euro exploded higher. Ahead of the US elections and with the EU leaders negotiating further details on the recovery fund, it appears that there is still further catch-up potential for Europe.
According to Barclays, the US has not controlled the virus as Europe has. Moreover, the political response in Europe is shaping up quite well, with investors perceiving the European Central Bank as proactive and ahead of the curve.
The EU Summit currently underway is unlikely to change things substantially. Provided there is not a negative surprise on hand, the summit lays down the road for how to spread the EUR750 billion pandemic recovery fund, a first-of-its-kind united fiscal program for the Eurozone.
In the meantime, until the US elections pass, investors face a simple decision – invest in a market that historically sees worse-than-average performance ahead of the election, or take a chance on the European stock market in a time when EU leaders still struggle to find a solution to funds’ distribution to satisfy all countries.
As always, there is no risk-free trade, but for once, the European stock market looks attractive.