Investors are snapping up European companies with high exposure to the U.S. to tap into strong economic growth across the Atlantic without putting money directly into expensive U.S. stocks.
The U.S. economy is expected to grow almost 2 percent this year, according to Reuters polls, outpacing most of the rest of the developed world. This should help Europe-listed house builders and healthcare firms, which have significant U.S. business and whose shares look cheap relative to U.S. peers.
"The U.S. stock market is not far off all-time highs and Europe is nowhere near that, so people are looking for companies in Europe which have that exposure to strong U.S. growth on a cheaper multiple than their U.S. equivalents," Derek Mitchell, senior fund manager at Royal London Asset Management, said.
"I certainly want the additional security that U.S. exposure gives me at this point."
The U.S. Dow Jones industrial average hit a record closing high on Tuesday. The comparable gauge of euro zone blue chips, the EuroSTOXX 50, is still 30 percent below its peaks.
"We expect growth in America to surprise to the upside. While we're confident over the U.S. economy, interestingly we're less positive on U.S. stocks, and have actually downgraded our U.S. view," Christopher Mahon, director of Asset Allocation Research at Baring Asset Management, said.
"The market is looking like it has gone too far, and it's quite expensive. There are better bargains to be had looking at other markets."
European stocks' discount to U.S. shares is one of its biggest of the past decade, based on revenues. S&P 500 companies trade at 1.4 times their expected sales over the next 12 months against a EuroSTOXX 50 ratio of 0.7 times.
"On price to sales, which we'd argue is one of the more useful measures for doing international comparisons, the U.S. has become noticeably more expensive than other markets versus its own history," Baring AM's Mahon said.
He sees the British stock market, which includes many internationally-focused companies, doing particularly well from their exposure to pockets of global growth.
"The UK market is in a sweet spot as it benefits from reasonable value and a global make-up. The UK should benefit from global growth from the U.S. as it has stocks which are so internationally oriented."
Companies in Britain's FTSE 100 derive nearly a quarter of revenues on average from the U.S.. David Esfandi, managing director of Ashcourt Rowan Asset Management, is buying those stocks, such as sugar firm Tate & Lyle and information provider Reed Elsevier, that have even greater U.S. exposure.
"We can get ample exposure to the U.S. via these companies. It's all about who benefits from the growth trends in the U.S., so if you've got over 50 percent exposure to the U.S., that's already doing it for us," Esfandi said.
European housebuilders stand to gain from a stronger U.S. housing market, which is expected to improve further in the coming year.
Data on Tuesday showed U.S. house prices rose in January at their fastest year-on-year pace since June 2006.
Spending on private residential construction was up 22 percent year-on-year in January, according to separate Commerce Department numbers.
Builders such as Wolseley, which, according to Thomson Reuters data, derives 47 percent of its revenues from the U.S., may cash in and analysts at Liberum Capital have upgraded the stock, citing its U.S. business.
The U.S. housing market stands in stark contrast to that of China, where officials are mulling tightening policy to prevent a property boom.
Nick Xanders, head of European equity strategy at BTIG, recommended playing that contrast by switching out of France's Lafarge, which profited from a boom in Asia last year, into CRH , which has twice as much exposure to the U.S.
U.S. growth could also boost European pharmaceutical firms.
Spanish healthcare company Grifols garners nearly 80 percent of revenues from North America, with Shire, Fresenius and AstraZeneca all deriving over 50 percent of their business from the continent.
"Pharmaceuticals have been very popular, as they're relatively stable with good cash flows," Xanders said.
"It's a combination of that defensiveness, but that exposure to relatively stable markets is key."
© 2016 Thomson/Reuters. All rights reserved.