Markets

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

What's bad for Donald Trump could be great for European stocks.

The scandal embroiling the U.S. President should help a rally that's seen returns from the benchmark Euro Stoxx 600 index surpass the Standard & Poor's 500 index this year.

For several years, the euro zone's political backdrop has given global investors a reason, or an excuse, to be wary of European equities. But with France's election out of the way, German Chancellor Angela Merkel looking set to stay in office and the risks of an early Italian vote receding, those concerns should be erased.

Investors appear to be turning bullish on Europe. After pulling more than $100 billion from European equity funds last year, they added a net $6.1 billion in the week to May 10, according to EPFR Global data cited by Bank of America Merrill Lynch.

Assets invested in BlackRock Inc.'s key U.S. exchange-traded fund focusing on European equities have climbed by 155 percent since December, my Bloomberg News colleague Elena Popina reported this week.

And yet the consensus forecast among strategists is for the Stoxx Europe 600 index to be lower by the end of the year.

That mismatch reflects how gains in European equities have outpaced expectations, even as surprised market watchers have increased their predictions in recent months.

Racing Ahead
The Stoxx Europe 600 index is outpacing where strategists say it will end the year, even as they boost their forecasts
Source: Bloomberg
Note: figures prior to May are month-end actual levels

Measured in dollars, euro zone stocks have delivered a total return of 17.2 percent so far this year, a bit more than twice what investors have made from the S&P 500. When measured in euros, however, U.S. returns are dwarfed by those available across the pond.

Four Times Nicer
Total returns including reinvested dividends, measured in euros
Source: Bloomberg

It's not just the European stock market that's outpaced expectations. The improving economic background has also caught soothsayers by surprise.

Beating Expectations
The European Commision's economic sentiment indicator for the euro zone
Source: European Commission via Bloomberg
Note: The indicator blends several surveys as follows -- industrial confidence indicator (40%), service confidence indicator (30%), consumer confidence indicator (20%), construction confidence indicator (5%), and retail trade confidence indicator (5%).

The European Commission's key economic sentiment indicator for the euro zone, for example, has beaten economists' expectations 15 times in the past three years, compared with just 10 occasions when the measure has undershot forecasts

Euro Zone Data Keeps Surprising
Citigroup's Economic Surprise indexes highlight the recent contrast between the euro zone and the U.S.
Source: Citigroup via Bloomberg
Note: "A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected."

While euro zone economic data has surprised consistently to the upside for the past six months or so, U.S. figures have recently started to undershoot consensus forecasts.

That improvement in the euro zone economy is also reflected in the foreign exchange market, where traders have turned bullish on the euro against the dollar for just the sixth time this decade.

Bullish on Euro
Net futures positions on CME Group exchange show traders are bullish on the euro versus dollar for only the sixth time this decade and for the first time in three years
Source: Commodity Futures Trading Commission via Bloomberg

To be sure, European equities will face a stiff headwind if the crisis engulfing the White House leads to the impeachment of the President and a battering for U.S. stocks. But given the contrast between the brightening political backdrop in Europe and the worsening infighting in the U.S., there's a strong argument that on a relative value basis Europe currently offers a haven.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net