Global Allocation Insight

Europe opts to kick-start growth

July 20, 2020

Coordinated policy action could be a
game-changer for European markets.

The sheer amount of fiscal and monetary stimulus provided in the U.S. in response to the devasting impact of COVID-19 has helped buoy the economy and support risk assets. More recently, European policymakers followed a similar path with a coordinated fiscal and monetary policy in the creation of the EU Recovery Fund. This is a significant deviation from the region’s historical reliance on monetary stimulus which had placed immense pressure on the banking system and had limited ability to propel growth.

Equally important as the coordinated effort is the greater adoption of fiscal leniency to peripheral economies. Driven by the increasingly common narrative among policymakers that no country is at fault for the pandemic and that this exogenous shock has produced asymmetric outcomes, the EU Recovery Fund is meant to provide disproportionate relief to select economies, with Italy, Spain and Greece appearing to be key beneficiaries.

We are witnessing a historic time for Europe and a potential investment game-changer for markets there. After years of lower interest rates, reaching negative rate status, Europe has now instituted some tangible initiatives that constructively marry fiscal policy to monetary initiatives. There have been few incentives in recent years to drive investment toward Europe, as evidenced in the chart below. However, with European asset valuations relatively attractive today, the shift in economic policy may be the catalyst for Europe to be the winner of incremental capital flow in the months to come.

European stocks could be poised for a pickup
Incremental flows into European vs. U.S. and Chinese stocks since the beginning of 2010

Chart: European stocks could be poised for a pickup

Source: Capital IQ, as of 12/31/2019. European stocks represented by EuroStoxx 600 Index; Chinese stocks, MSCI China Index; U.S. stocks, S&P 500 Index.

The team’s bearish view on Europe in the past was driven by the region’s heavy emphasis on sectors challenged by secular headwinds such as energy and autos. However, accelerating monetary support coupled with joint fiscal efforts that may temporarily mitigate these headwinds give us reason to become more constructive on continental Europe.

Within the BlackRock Global Allocation Fund, we have moved from an underweight to a modest overweight in European stocks as of the end of June. This exposure is diversified across several innovative companies, notably within the materials, consumer discretionary and communication sectors. In addition to their attractive valuations and growth potential from policy support, we believe the fund’s European stock positions could help offset risks relating to our U.S. stock overweight in the coming months amid the presidential election, COVID headlines and increased social unrest.

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Rick Rieder
Rick Rieder
Chief Investment Officer of Global Fixed Income and Head of the Global Allocation Team
Russ Koesterich, CFA, JD
Russ Koesterich, CFA, JD
Portfolio Manager,
BlackRock Global Allocation Team
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team.   Mr. Koesterich's service with the firm dates back to 2005, ...
David Clayton, CFA, JD
David Clayton, CFA, JD
Portfolio Manager,
BlackRock Global Allocation Team
David Clayton, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team.   Mr. Clayton joined the BlackRock Global Allocation team in ...
Kate Moore
Kate Moore
Head of Thematic Strategy,
BlackRock Global Allocation Team
Kate Moore, Managing Director, is a member of the Global Allocation investment team and Head of Thematic Strategy. Her investment mandate includes identifying ...

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