Europe’s stocks are back in the lead

Four months ago, the start of the Iran war derailed a rally in European stocks. Now, the prospect of easing inflation and stronger economic growth is setting the region up for a standout second half of the year.

The Stoxx Europe 600 Index is up about 1.5% this month as the US and Iran reached an interim deal to reopen the all-important Strait of Hormuz. The S&P 500, on the other hand, has dropped 1%.

While a long-term peace deal between Washington and Tehran is far from done, oil prices have declined nearly 30% in the past month. That suggests investors don’t expect a major re-escalation in the war.

That bodes well for sectors such as banks, automakers and luxury goods. Meanwhile Europe’s lack of big AI companies is perceived to be an advantage, with the US tech trade faltering on worries the rally has gone too far.

“The investment case for the ‘buy Europe’ trade is back,” said Raphael Thuin of Tikehau. “When you invest in Europe you are diversifying away from the risk in tech and so we like our exposure to Europe which we have reinforced recently. This is the right moment to put cyclicals back into portfolios.”

Counterpoint: Some investors remain unconvinced about Europe’s prospects. A recent survey by Bank of America showed a net 4% of fund managers expect regional stocks to decline over the coming months. —_Sagarika Jaisinghani__,_ _Julien Ponthus_ _and_ _Michael Msika_