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Going into 2021, enthusiasm was high about a global pandemic recovery. Which markets have further room to run in the year of the recovery? Looking ahead, European equities should stay supported given a substantial improvement in vaccinations, upcoming fiscal support, and a sizable valuation discount relative to the US for a market that offers access to both the cyclical recovery and an inflation hedge, Gabriela Santos, Global Market Strategist at JP Morgan, reports.

Daily vaccination rates have picked up in Europe

From vaccine laggard to leader

“In the first quarter, much of the disappointment around Europe centered on its slow start to the vaccination process. In April, this rapidly changed, with the pace of daily vaccinations doubling as bureaucratic issues around procurement and distribution were ironed out. In fact, European countries are now vaccinating a higher share of their population per day than the US, with an average of 0.8% versus 0.6%.”

Taking the fiscal spotlight

“In the first quarter, much of the enthusiasm about the US centered on the unexpectedly large fiscal package approved in March. The attention is now turning to Europe, as countries are set to receive the first disbursements from the game-changing EU Fiscal Recovery Fund around mid-year, which will help countries around the region to recover on much more even footing this time around.”

A hedge for inflation  

“This quarter, investors’ focus has turned to the inflation debate. Cyclical sectors can provide a hedge against rising inflation – and Europe is a region that provides the biggest cyclical bang for the buck, with 55% of its market made up of cyclical sectors (versus 33% in the US).”

Better starting point this cycle

“Despite its recent outperformance, European equity valuations are still at a steep discount to the US after a decade-plus of underperformance: -18% current vs. -10% average discount based on the forward price-to-earnings ratio.”