Legal & General Joins Europe Stock Skeptics as Bounce Lags U.S.

  • Stronger euro threatens to curb revenue for exporters
  • Loose monetary policy needed for longer: Legal & General

The Key Takeaways From Market Volatility

European equities are trailing U.S. stocks in their recovery from the worst selloff in two years as the stronger euro threatens earnings and concerns about higher interest rates weigh on investor appetite.

The Stoxx Europe 600 index has retraced only about a third of the correction that wiped out almost $1 trillion from the region’s equities. The S&P 500 gauge has recovered more than half of its losses.

Investors, such as Legal & General Investment Management, are hesitant to pile back into European stocks as the euro trading at a three-year high threatens to curb exporters’ revenue and as Barclays Plc predicts the European Central Bank will raise interest rates as soon as this year. Stocks around the globe plunged at the start of February as rising U.S. Treasury yields made money managers doubt the validity of record-high equity valuations.

“The stronger euro could cause a lower value of foreign profits for European companies,” said John Roe, London-based head of multi-asset funds at Legal & General Investment Management, which oversees about $1.3 trillion. Roe has bought U.S. and Japanese, but not European equities, over the past two weeks. “Europe needs low rates and loose monetary policy for longer, because the economy is two to three years behind the U.S.”

Since European companies get roughly half their sales from outside the region, the direction of the euro can have an impact on earnings. Investors are intensifying their scrutiny of the ECB’s communications as the euro zone’s economic expansion raises expectations that quantitative easing, which will total 2.55 trillion euros ($3.2 trillion) by September, is close to being halted.

The Stoxx Europe 600 index lost 8.5 percent from its Jan. 23 high through Feb. 9 and has risen 2.9 percent this week. The S&P 500 dropped 10 percent from its Jan. 26 high through Feb. 8 and has since recovered about 6 percent.

— With assistance by Blaise Robinson

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