Investors sometimes use national stockmarkets as a shorthand for their views about a country, but that doesn’t mean that a given market tells you much about the domestic economy. Take the FTSE 100. It’s the key UK equity index but it’s full of firms that don’t do a huge amount of business in Britain. It’s just a collection of companies that happen to be listed in London. The same is true for many European markets and for regional indices such as MSCI Europe.
That matters because markets get hooked on narratives, and the dominant one today is that the US means growth, while Europe is boring (if cheap). These narratives are hard to dislodge, but over time they can decline in usefulness. This might be the case in Europe, according to a recent report from analysts at Morgan Stanley. They argue that European markets are changing, with new sectors becoming more important.
Bye-bye banks
Some of the highlights really stand out. The biggest sector in Europe? Banks or energy stocks? No – healthcare and especially pharmaceuticals. Technology stocks account for about 8% of the value of the MSCI Europe index, on a par with banks, which have halved in importance since 2010. Energy has also shrunk, to under 5%.
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Or if we go by countries, Germany is hugely important – but not the conventional story of engineering giants hooked on China. The largest sector in the MSCI Germany index is technology (16%), with healthcare on 12%. Meanwhile, Denmark and The Netherlands are far more important to the European markets than either Italy or Spain. In fact Denmark has been the best-performing country in Europe over the last decade, driven by healthcare.
Of course, if we look at the current situation, the picture is mixed. On the plus side, the European Union is finally providing more bloc-wide fiscal safety nets, which could make a huge difference in the long term. On the negative side, while Europe seemed to be making a better job of controlling coronavirus until a few weeks ago, that’s now clearly evolving for the worse. Expect more short-term market weakness.
Investing for growth
Still, if you want to invest in the region, there’s an excellent list of first-rate funds. These include the Baillie Gifford European Growth (LSE: BGEU), which is typical of the growth-investing style of this fund house. Top holdings include Prosus (more on which shortly), Zalando (online fashion) and IMCD (speciality chemicals and foodstuffs). BlackRock Greater Europe (LSE: BRGE) has big holdings in popular growth sectors including drugs giant Novo Nordisk, Sika (a specialist chemicals business), publisher Relx and B2B tech giant SAP. I’d also highlight the BlackRock European Dynamic Fund, which has a similar strategy and profile to the investment trust. But my own personal favourite is Montanaro European Smaller Companies Trust (LSE: MTE), which invests in a growth-orientated mix of smaller businesses (disclosure: Merryn Somerset Webb, MoneyWeek’s editor-in-chief, is a non-executive director of this trust).
There’s also my parting thought, Prosus (Amsterdam: PRX). This is a weird beast. It’s the Dutch-listed international assets division of South African media firm Naspers, which is a first-rate venture capitalist that made huge profits investing in Chinese internet giant Tencent many years ago. But it is no one-trick pony: its portfolio of investments is second to none for a business listed on the public markets. You’ve got stakes in everything from familiar names such as Autotrader, Mail.Ru and Delivery Hero through to a very diversified portfolio of newer businesses. The shares trade at a big discount to the portfolio valuation, but you get a really compelling set of businesses across different sectors, all for a very reasonable price.
Tech’s growing clout in Europe
In Europe, the technology sector has surpassed the value of banks for the first time, reports the Financial Times. Ten years ago, tech accounted for just 4% of the MSCI EMU index, compared to 24% for banks, according to Morgan Stanley. Yet low interest rates have weighed on bank profitability, and the sector has tumbled by a third this year. Meanwhile, European tech stocks have advanced 11% in 2020. Hence the Refinitiv Europe technology index is now worth more (€842bn) than the banks (€822bn). A bias towards “legacy” industries such as banks has been a “significant driver” of the European market’s underperformance “over the last decade”, says Morgan Stanley. Yet with tech rising, things are changing on these bourses.
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