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There are many investors of concern as Europe’s stocks break records

(Bloomberg) – European stocks are at record highs, vaccination rates are rising and central banks are pouring trillions of dollars into the economy. But there’s still a lot that could go wrong with a resurgent coronavirus outbreak, another missed summer vacation season, and elections keeping investors up at night. While the pandemic turned 2020 into a rollercoaster ride on the stock market, the year 2021 has started more optimistically. The Stoxx Europe 600 Index is up 9.6% this year and hit an all-time high in April. The VStoxx index of volatility in the euro area has settled to near pre-pandemic levels, and there have been few major season breakdowns to date. Still, there are many potential pitfalls: “We see 2021 as a year for equities as the recovery turns into expansion,” said Cristina Rodriguez Iza, who oversees $ 42 billion at Santander as head of global multi-asset solutions Asset Management Spain. “Anything that cancels this recovery could pose a risk to stocks.” Investors in European stocks are the most concerned: No fund SunSetbacks to Life going back to normal are the biggest risk to the market rally, according to fund managers. The reopening is especially important for businesses and economies that depend on travel and tourism. The European Stoxx 600 Travel & Leisure Index has risen 24% this year in the hope that summer vacation will be possible. Any hiccups on the vaccine launch could cause a setback for stocks like discount airline EasyJet Plc and IAG SA, the owner of British Airways. The vaccination campaign is now accelerating after a slow start in continental Europe, but there has been a surge in coronavirus cases after variants of the virus emerged like India. “The greatest risk is that a mutation in the virus will appear resistant to vaccines because it would have devastating effects,” said Enrique Marazuela, chief investment officer at BBVA Private Banking, in comments sent by email. “The rise in the stock markets is based on the thesis that the pandemic will be eradicated before the end of 2021.” Political hurdles that are closer to home cannot be ignored. In France, voters will take part in regional elections in June, anticipating the presidential election around this time next year. Far-right leader Marine Le Pen has pulled back from unpopular ideas like leaving the euro bloc, and her popularity is growing. Germany is also holding national elections in September, with the Greens making strong gains in opinion polls. Anything that turns the established political order upside down could at least cause short-term volatility in stocks, with the risk of a more sustained decline if governments with less market-friendliness policy are chosen. “There is now the possibility from the outside that it is a Green-led coalition that could lead to left parties in power to join the Greens,” said Nick Edwards, manager of the Guinness European Equity Income Fund Poll. “If Marine Le Pen prevailed in the French elections next year, the markets would withdraw, but with Frexit and Eurexit, probably only temporarily, off the table.” Also on the radar: Scotland will hold elections next week that have brought new results. Independence will be brought back into focus and the resignation of Northern Ireland’s first minister could add more instability to the implementation of Brexit. Back to Earth, while some sectors struggled over the past year as economies across Europe shut down, the pandemic restrictions have been a boon to businesses like an online grocery delivery and payment company. However, given the high level of investor expectations, there is a risk that momentum will weaken for some of these lockdown winners. While revenues from food equipment maker HelloFresh SE, grocery supplier Delivery Hero SE and online casino operator Evolution Gaming Group AB show that they are still enjoying a pandemic growth spurt, early cracks are emerging. Swedish mobile messaging company Sinch AB rose nearly 370% in 2020 and was Europe’s top performing stock. However, the stock fell 11% on Wednesday after earnings fell short of analysts’ expectations. “The companies faced very simple year-on-year comparisons and were able to do so, Richard Scrope, manager of the VT Tyndall Global Select Fund, said via email. “Going forward will be more difficult to grow and we think many companies have exceeded their potential.” The Inflation Question Rising inflation is another risk on investor watchlists as companies push prices up when economies return open while consumers continue to grow buying frenzy. And with rising raw material prices, companies could also see higher input costs. Investor concern is also that if the economy gets too hot, central banks could cut pandemic support too soon. This will be a main topic at the next meeting of the European Central Bank in June and is also a focus for the US Federal Reserve, especially if Treasury bond yields rise on inflation bets. “A major risk to our outlook for Europe is inadequate budget support,” said Grace Peters, EMEA director of investment strategy at JP Morgan Private Bank, in emailed comments. “Any indication of a return to austerity could bring downside risks to growth, fears of a resurgence of political populism and a widening of the risk premium on European assets.” President Joe Biden’s proposals to raise taxes are a priority for investors. The Bank of America Corp. monthly survey in April found that tax hikes are a growing concern for fund managers, cited by 15% of respondents as the greatest risk to end-use. The main concern of stock investors is that Biden’s plan can provoke preventive sales, lower stock valuations, and slow the rally in technology stocks. The Biden administration revealed plans to pay for their $ 1.8 trillion spending plan with higher taxes, which is focused on the richest Americans. On the bright side there are certainly risks out there. That being said, they are not the fund managers’ base case scenario for European equities this year. Most see an economic recovery that will benefit the region as it is more heavily weighted in cyclical sectors. European stocks are also cheaper compared to the US, say the optimists. Hugh Gimber, global market strategist at JP Morgan Asset Management, said the fund flow data shows how many times European stocks have been overlooked in recent years, but the pieces are there that should change. “The introduction of vaccines across the continent has stumbled off the blocks, but we are probably past the point of greatest pessimism now,” Gimber said via email. “Our confidence in a significant economic reopening in the summer months is growing.” For more articles like this, visit bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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