That chimes with the view of some major money managers including Amundi and PGIM Fixed Income, who are piling into peripheral debt in expectation of a convergence trade.

“Markets, notably FX markets and, to a lesser extent bond markets, are not well positioned for renewed euro area growth,” SocGen strategists including Michel Martinez wrote in their report. “Expectations may have been overly influenced by the weakness of the PMI surveys, as well as the German industrial sector” along with poor economic data, trade tensions with the U.S. and risks such as Brexit, they said.

Confidence Crushed

Those kinds of concerns have helped drive economic confidence in Europe to the lowest level in more than two years. Small wonder that Bank of America’s global fund-manager survey has shown that shorting European equities is one of the most-crowded current trades.

In fact the region’s stocks have posted outflows in the period since the Brexit referendum through last week of nearly $140 billion, even as the benchmark gauge has advanced. Investors expect the Stoxx Europe 600 Index to fall about 9 percent from Monday’s close to the end of the year, according to a Bloomberg poll published April 18.

“European growth can recover in the context of a global recovery,” said Benjamin Jones, a senior multi-asset strategist at State Street Global Markets in London. “However, I don’t think that means that European equities necessarily outperform U.S. or emerging markets. Valuations are not all that depressed in Europe and growth will continue to lag other regions.” A lack of big technology stocks and exposure to Europe’s troubled banks will also weigh on regional equities, he said.

SocGen acknowledged its optimism is at odds with many of its clients, and also noted that credit and equities look better positioned for economic surprises.

The Stoxx Europe 600 Index has gained almost 16 percent in 2019, not far behind the S&P 500’s 17 percent gain. Gauges tracking default swaps for both investment grade and high-yield bonds are both trading near the lowest in a year.

The strategists recommended maintaining an overweight position on high yield, going long European auto stocks and long euro-zone small caps.

“Our above-consensus euro area growth forecast for 2019 could extend out to the ‘pain trade’ for investors who continue to shun euro assets,” they wrote.