As the end of January nears, investors await the two main central banks’ decisions – the Federal Reserve of the United States (Fed) and the European Central Bank (ECB). Both are scheduled to release their monetary policy decisions next week on Wednesday (Fed) and Thursday (ECB).
These two events will set up the stage for future market movements. In Europe, the main refinancing rate is at 2.5%, while the funds rate in the United States is at 4.5%.
Both the ECB and the Fed will hike next week – the former by 50bp and the latter by 25bp if there are no surprises. But even so, one cannot ignore the interest rate differential in the two major economies.
Higher interest rates are detrimental to stocks. As such, one of the main reasons to buy European stocks is the interest rate differential that favors Europe instead of the United States.
So what are the other two?
In January, the largest stock ETF in Europe saw the largest monthly inflow in June 2021. $700 million were invested in January in the Vanguard FTSE Europe ETF.
It is said that one should follow the money for the biggest returns. Money is flowing to Europe.
Unsurprisingly, one may say. Sweet deals are on the horizon, as Europe was heavily shorted last year.
For example, take European banks. They trade well below the 20-year average, and now the ECB is raising rates. Plenty of other opportunities exist, including in the German industrial sector, which suffered from the energy crisis.
Regarding the energy crisis and the German stock market, investors seem to have already discounted the war in Ukraine. Also, the dependency on Russian energy does not seem to be a worry anymore, given the increased efforts to diversify it away.
As I wrote in this article, the German Dax index started the year on a strong note. In less than a month, it gained more than 1,000 points.
If we couple the strong German stock market performance with the inflows of capital, then we have an educated guess of where the money went.
All in all, investors turned their attention to Europe in 2023. Should you too?
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