France’s CAC 40 share index has fallen 9% from a mid-May high. Paris has underperformed wider European markets, with the Euro Stoxx 50 index up almost 9% for the year-to-date. But for all the talk of European stagnation, “equities in Europe have delivered nearly as much” as US ones over the past few years, says Hubert de Barochez for Capital Economics.
While US valuations have risen faster, European ones have kept pace thanks to improved earnings expectations and higher dividend payments. French stocks even outperformed US ones between the end of 2021 and June this year, before Macron’s snap election sank the Paris bourse. All is not lost. When America’s “AI bubble” eventually bursts, Europe could enjoy a renewed period of outperformance. Eurozone valuations are close to “historic lows” relative to frothy US stocks, say Oliver Girakhou and Carly Brewster of asset manager Robeco.
On a price-to-earnings basis, the MSCI Eurozone index has been trading at discounts to America that are comparable to dotcom or euro-crisis lows. Lower valuations provide a “firm floor” for stocks in the case of bad news. While Europe’s own growth prospects are poor, the region’s stocks are unusually multinational: 60% of MSCI Europe revenue originates from outside the eurozone. Deutsche Bank estimates that a mere 18% of Dax 40 revenue comes from Germany, less than the 22% from the US.
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What is the outlook for European stocks?
Investors’ perception of Europe has been coloured by a 15-year period of poor post-financial-crisis performance, says Oliver Collin of Invesco. Much of the drag came from weakness in once dominant banking stocks, but balance sheets have been fixed and the banks are today paying “handsome dividends” once more. “History suggests it would only take a small positive shift in expectations” to deliver “an outsized share price performance”.
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