(Bloomberg) — The almost uninterrupted rally in European stocks and corporate bonds over the past year has sent valuation metrics to frothy levels, setting the stage for potential pull-backs as Europe struggles with its vaccine rollout which could imperil the region’s economic recovery.
With Europe’s equity benchmark trading at a near record-high valuation level, the word “bubble” is creeping into analysts’ notes, following sharp gains fueled by unprecedented stimulus measures from central banks and governments fighting the economic impact from the pandemic.While returns-hungry investors continue to pile into risky assets, a number of strategists warn of a growing disconnect between prices and the economic reality in various corners of the market, from Europe’s renewable energy shares to investment-grade corporate bonds.
“Compartments of the markets have moved significantly above fair value,” said Kasper Elmgreen, head of equities at Amundi. “Gravity is a powerful force, where there are bubbles building they will eventually burst no matter how elevated valuations can become before this happens.”
The Stoxx Europe 600 Index — which just recorded its best weekly gain since mid-November, up 3.5% — trades at 17 times forward earnings, well above its 10-year average of around 14 times. In early January, about 90% of Stoxx 600 were trading above their 200-day moving average, the most since 2017, near a level that turned out to be a technical sell signal in the past.
The markets got their latest boost after day-traders triggered a boom, followed by rapid declines, in shares of companies like Gamestop Corp. and Nokia Oyj as short sellers rushed to unwind negative bets. While the brawl between the retail traders and hedge funds has abated, it is seen by many analysts and investors as a sign the market is overheating.“Increased retail participation in equity markets is a typical side effect of bull markets and of bull markets overshooting into bubbles,” said Lars Kreckel, global equity strategist at Legal & General Investment Management.
Another worrying trend is the outperformance since October of European companies with weaker balance sheets. That phenomenon, like the day-trader drama, is a function of cheap money that’s emboldening investors to take risks, and is “symptomatic of a very frothy and speculative market,” said Suzanne Hutchins, a portfolio manager at Newton Investment Management.
“Markets are fragile and the manipulation by central banks keeping a tight lid on interest rates creates lots of unforeseen risks,” she said.
While European stocks are still nowhere near record valuation levels seen on Wall Street, one segment has seen astronomical surges: renewables. Even after the recent retreat, Indxx Renewable Energy Index is trading at 40 times earnings, double the multiple of the MSCI World Index.
Bank of America Corp. strategists said clean-energy ETF flows are creating potential…
Go to the news source: Frothy Markets Spark Worries of Bubbles in European Assets