Traders talk in front of the German share price index board at the Frankfurt Stock Exchange. Investors drawing the parallel between Europe and Japan are hoping the European Central Bank’s measures will ignite another surge in the region’s stocks.

Bloomberg
London


European stocks are starting to bear a passing resemblance to Japan’s. That may not be a bad thing, judging by the 139% surge in the Topix index since 2012.
The Euro Stoxx 50 Index and the euro have moved in opposite directions on 61% of days this year, the most since 2003. The equity measure jumped 4% last week, while the euro weakened 3% against the dollar. In Japan, the stock market and the yen have traded inversely more than half of the time since 2006.
The parallels are real and portend more gains, according to Julius Baer Group’s Christian Gattiker. While Japan’s economy is different, both it and Europe have central banks bent on reviving growth and lifting earnings. Investors in Europe can get back to concentrating on that now that the threat posed by Greece is receding, he says.
“It’s a very similar environment in Europe, just with a lag,” said Gattiker, head of research at Julius Baer in Zurich. “Just as the rally continued when Japan’s economy started to show signs of life, that will be the next leg up for Europe.”
Economic growth in Europe and Japan has lagged behind the US in five of the past six years. Japanese stocks started to take off in 2012 in anticipation of additional stimulus. Exporters led the first wave of the Topix rally and domestic stocks followed.
In Europe, equities have gained 17% this year. They posted their biggest first-quarter jump since 1998 as the ECB announced plans to inject €1.1tn ($1.2tn) into the economy, triggering a slump of as much as 14% in the euro. Carmakers, the region’s exporting bellwethers, led the rally.
Data suggests Draghi’s strategy to revive growth is working, with gross domestic product projected to increase 1.5% for the euro area this year. The ECB president pledged last week to use “all the instruments available” needed to foster expansion.
To be sure, central-bank policy is just one piece of the puzzle. There was no Draghi when the Euro Stoxx 50 rose at an average annual rate of about 8% from its inception in 1987 to the 2007 high. While the gains were almost three times as big between 2012 and this year’s high, equities were also recovering from the financial crisis that erased €1.6tn in the index’s market value.
Investors drawing the parallel between Europe and Japan are hoping Draghi’s measures will ignite another surge in the region’s stocks.
Japanese companies gained $2.9tn in value in three years as the Bank of Japan increased its asset-buying programme, also purchasing exchange-traded funds and real-estate investment trusts. The equity advance continued even after the link between the yen and the stock market began to unwind, as domestic demand boosted profits at Japanese companies without any help from the weak currency.
For Francois Savary at Reyl & Cie, Europe is following a similar path and evidence of increasing demand at home will eventually break down the currency trade. Household consumption has expanded by the most since 2007, while European car sales rose at the fastest pace in more than five years.
“There are episodes when the stock-currency comes into the forefront and you buy into that, but in the long term that’s not what matters,” Savary, Reyl’s chief investment officer, said by phone from Geneva. “Some of the biggest stocks in Europe depend far more on domestic growth than overseas.”
Financial companies are the investment of choice for strategists at Barclays, Citigroup and Credit Suisse Group, according to notes this month. France’s BNP Paribas makes about 76% of its revenue in Europe, and Dutch lender ING Groep generates 87% in the region.
Barclays predicts the Stoxx Euro 50 will rise another 9% by December. While company analysts are the least bullish since 1995, history signals such negative sentiment precedes equity gains in the next year, according to a July 16 note. The brokerage has said that profit growth will justify higher valuations in Europe and Japan.
The Euro Stoxx 50 trades at 15.7 times estimated earnings, up from 12.6 in January, and the Topix at 15.9 from 14.8. The multiple for the Standard & Poor’s 500 Index is 17.9.
“Given our view of global growth acceleration in H2, we stick to our long European and Japan equity trades,” Guillermo Felices, Barclays’s head of asset allocation in Europe, wrote in a July 15 note. “We recommended overweight exposure to cyclical assets.”