After three summers of Americans vacationing domestically, there has been a significant shift towards international travel this summer, according to Truist analyst Patrick Scholes. Allianz Partners, a travel insurer, predicted in May that the number of Americans traveling to Europe would increase by 55% compared to last summer. U.S.-based tour operators are also seeing strong demand for European tours.
This surge in trips to Europe is expected to benefit companies involved in travel and hospitality. Despite this, European stocks offer compelling value even after accounting for these positive factors.
Citigroup strategists highlight that the Stoxx Europe 600 index is currently trading at a 36% discount to the S&P 500 based on 12-month forward price-to-earnings ratios. In fact, European stocks have never been cheaper compared to their U.S. counterparts. Recognizing this attractive valuation opportunity, Citigroup upgraded European shares to overweight and downgraded their rating on U.S. stocks to neutral.
The Citigroup strategists believe that a weaker dollar and potential stimulus from China will further support European stocks. They caution investors in U.S. stocks, who have already enjoyed significant gains this year, to exercise prudence. Year to date, the Stoxx Europe 600 is up 6.9%, while the S&P 500 has risen by 16.8%.
“Our U.S. strategy team thinks megacap growth is set for a pullback, while U.S. recession risks could still bite,” wrote Citi’s U.S. equity strategist Scott Chronert in a note.
Exploring the Potential of International Stocks
The argument for international stocks may understandably elicit skepticism. After all, U.S. stocks have easily outpaced international equities since 2010.
However, non-U.S. stocks have outpaced U.S. stocks for extended periods in the past, such as the mid-1980s and from the late 1990s into the mid-2000s, according to Morningstar.
Although Morningstar stops short of making an outright prediction that non-U.S. stocks will resume leadership, it says improving fundamentals and corporate governance could act as catalysts for those stocks to outperform. “But perhaps the strongest rationale is the market’s most pervasive phenomenon: mean reversion,” the firm writes.
Broad Exposure to European Stocks
Investors can gain broad exposure to European stocks through popular low-cost ETFs, including the Vanguard FTSE Europe ETF (ticker: VGK) and iShares Core MSCI Europe ETF (IEUR). Both were 2% higher Wednesday after the U.S. government released June consumer price index data pointing to a further slowdown of inflation.