Equity investors should look to Europe for growth

Are European equities being left behind? The pan-European Stoxx Europe 600 index enjoyed a strong start to the week on the back of the S&P 500’s new highs and the latest uptick in German business confidence (see page 11).

Yet a brief period of outperformance compared with the US index earlier this summer already appears to be over. The Stoxx Europe 600 has advanced just over 1% over the past month and is still down 11% for the year to date. By contrast, this year Japan’s Topix index has fallen 4% and the S&P 500 and China’s CSI 300 have gained 5% and 14% respectively.

The main factor driving the divergence has been the strength of technology stocks, Guy Foster of Brewin Dolphin told Tommy Stubbington in the Financial Times. “The UK has virtually no tech, and Europe doesn’t have that much.”

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The underperformance is part of a long-term trend. As Tom Bailey notes on Interactive Investor, the MSCI Europe index has delivered a total return of 94.5% over the last ten years, compared with 311% from the American equivalent. Europe’s markets struggled after the financial crisis, not least because of rigid government budget rules that choked off growth.

But things are different in 2020, says a Goldman Sachs note. The German and French governments recently announced additional stimulus measures, while the €750bn European recovery plan will provide a dose of much needed fiscal solidarity with southern states, which have been hit hard by the pandemic.

An alternative to a pricey US

Wall Street money managers think that “Europe could be the antidote” to highly rated US stocks, say Ksenia Galouchko and William Shaw on Bloomberg. Rich valuations, election tensions and disputes with Beijing have initiated a “scramble for alternatives” to American assets.

This month’s Bank of America Merrill Lynch fund manager survey finds Europe is their favourite region. Then again, this wouldn’t be the first time investors have got excited about the old continent only for Europe’s bourses to disappoint.

Lacklustre energy and finance companies still play an outsized role on European indices, but investors shouldn’t underestimate Europe’s hidden growth stories, says Ian Conway in Shares.

From Dutch semiconductor specialist ASML and German software giant SAP to the continent’s world-leading pharmaceutical players, there are plenty of growth companies if you know where to look.

What’s more, European shares come with less “concentration risk” than US portfolios, which have become worryingly reliant on a handful of technology mega-corporations. Growth-hungry British investors need only look “across the Channel”.