Investors should give European stockmarkets a second look

Investors tend to think that European stockmarkets are full of stale “old economy” firms while the US is full of fast-growing tech stocks. But European markets now offer their own healthy mix of quality growth stocks.

A surge in coronavirus cases in Europe means that talk of a swift recovery is now a “summer memory”, says Peter Goodman in The New York Times. French prime minister Jean Castex this week acknowledged that “the second wave is here”, as governments across the continent tightened restrictions. Spain has declared a state of emergency in Madrid and instituted a partial lockdown there. 

Economic gloom is spreading. France now expects activity to remain stuck at 95% of pre-pandemic levels for the rest of the year. Spanish business sentiment hit a four-month low last month. The pan-European Europe Stoxx 600 index is down 11% so far this year. 

The changing of the guard

The common investment “trope” is that Europe is full of “old economy” firms while the US races ahead with technology, says Graham Secker in the Financial Times. Yet that idea is “outdated”. Banks and energy no longer dominate the MSCI Europe index. Indeed, the weighting of banks on European indices is now the same as the global average. The areas where European markets are “overweight” the global average today – healthcare, consumer staples and industrials – offer a “healthy mix of good, quality growth”. The European “leopard is indeed changing its spots”. 

If the US market is increasingly a wager on tech, then Europe is “a bet on drugs”, says Stephen Wilmot in The Wall Street Journal. Five of its ten biggest firms are now drugs firms. Back in 2004 the top three Stoxx Europe 50 firms were all British: BP, HSBC and Vodafone. Today’s leading trio are Swiss: two pharmaceutical giants (Roche and Novartis) and Nestlé. Europe offers other “growth niches” as well, from French luxury goods to Danish cleantech (energy efficiency), says Reshma Kapadia in Barron’s. America’s S&P 500 has “eviscerated” other markets over the past decade, “returning 13.9% a year, on average” against 5.5% for the World ex-US. 

Yet stretched valuations are giving Americans the “urge to do some portfolio globe-trotting”. If we strip out expectations about growth and just look at current valuations, then US equities are “priced to deliver” just 0.5% in annual real returns over the next decade, says Robert Arnott, the founder of Research Affiliates. Europe and Japan are offering real returns of “about 5%”.

A German anchor

Germany’s Dax has outperformed other European markets this year, falling by just 2.2%, thanks to the country’s export-led exposure to the strong Chinese recovery, says Anna Isaac in The Wall Street Journal. Analysts think German carmakers will also get a boost as the pandemic makes more people avoid public transport. In 2018 the debt of German non-financial companies was about 58% of GDP, compared with 84% in the UK and 141% in France. As Christoph Ohme of DWS Group puts it, strong public and corporate finances make Germany resilient in a crisis. It is a “stable anchor” for the world economy. 

Recommended

The hidden cost of employee share schemes
Investment strategy

The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.
26 Sep 2022
Sterling crashes to its lowest since 1985 after mini-Budget
Currencies

Sterling crashes to its lowest since 1985 after mini-Budget

The pound has fallen hard and is heading towards parity with the US dollar. Saloni Sardana explains why, and what it means for the UK, for markets and…
23 Sep 2022
Earn 3.7% from the best savings accounts
Savings

Earn 3.7% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
23 Sep 2022
Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022

Most Popular

Could gold be the basis for a new global currency?
Gold

Could gold be the basis for a new global currency?

Gold has always been the most reliable form of money. Now collaboration between China and Russia could lead to a new gold-backed means of exchange – g…
22 Sep 2022
Paypal, bitcoin, and the weaponisation of money
Bitcoin & crypto

Paypal, bitcoin, and the weaponisation of money

Recent events have shown how both business and governments can “weaponise” money and shut down dissent. What to do? Buy bitcoin, says Dominic Frisby.
22 Sep 2022
Why you should short this satellite broadband company
Trading

Why you should short this satellite broadband company

With an ill-considered business plan, satellite broadband company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short th…
23 Sep 2022