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European stocks to outperform the US for the rest of 2019, strategist says

Key Points
  • The ongoing trade war is weighing on global growth and some traders don't expect any sudden uptick in economic activity.
  • However, the coming months could also prove turbulent for European equities.
  • The euro zone is largely dependent on its exports, in particular from Germany.

Stock prices in Europe are more likely to rise than in the United States over the remainder of 2019, a strategist told CNBC Thursday.

Both European and U.S. equities have experienced a sell-off in recent days on the back of growing tensions between the United States and China. The ongoing trade war is weighing on global growth and some traders don't expect any sudden uptick in economic activity.

"We think that equities around the world will fall during the rest of this year. This is tied to our view that global economic growth will slow further, and earnings will disappoint as a result," Hubert de Barochez, markets economist at research consultancy Capital Economics said via email.

Slower economic activity translates into less consumer power and a more difficult environment for some companies to navigate.

"We expect that to be particularly the case in the U.S.," Barochez said, adding that "in the euro zone, given that a lot of bad news seems to be already priced in, we think that equities there will hold up better."

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According to Capital Economics, there are three reasons why European equities will outperform U.S. stocks. The euro is set to fall further against the dollar, which boosts European exports and thus helps economic activity in the euro zone; there is more scope for growth to undershoot expectations in the U.S. than the euro zone; and there are unrealistic expectations about monetary policy — despite ongoing pressure from President Donald Trump.

"Investors appear to have got ahead of themselves in expecting rapid rate cuts by the Fed," the firm said in a note Wednesday. In July, the Federal Reserve decided to cut rates for the first time in more than a decade and it suggested that it was unlikely to do the same again soon – which went against market expectations.

However, the coming months could also prove turbulent for European equities.

"Chinese demand for German exports has been under pressure due to the US/China trade concerns and with the Renminbi devaluing further, making German goods more expensive in Renminbi terms, this does little to support German manufacturing," Brooks Macdonald, an U.K. investment management firm, said in an email Thursday.

The euro zone is largely dependent on its exports, in particular from Germany – the growth engine of the region.

"Longer term, trade wars are not purely a unilateral US/China issue, as a result there remains a risk that should these US/China trade issues be resolved that Trump will simply pivot towards the EU, directly impacting trade with the EU's largest trading partner, Edward Park, Deputy CIO at Brooks Macdonald said in the email.

Trump has slapped tariffs on European steel and aluminium and has often blamed the region for not being a fair trade partner. Trump is also due to decide whether to impose car tariffs on Europe by mid-November. The sector is one of the most important growth drivers for the region.