As winter arrives, temperatures drop, migratory birds cross the Strait of Gibraltar on their way to Africa and financial analysts predict that the European stock market will actually outperform that of the United States (US) this year. . Reality is stubborn and has turned against them in the last 10 years. The average annual return of the S&P 500 index – which summarizes the performance of the largest publicly traded North American companies – was 13% during this period. Almost twice as much as its European counterpart, the Stoxx 600.
This decade, the Old Continent index outperformed Wall Street firms in only two years (2022 and 2017). And it was on the hair. Since the 2008 financial crisis and the Great Recession, betting on Europe's listed companies has been bad business.
And the fact is that the arguments for prioritizing investments in European companies are repeated year after year: they are listed at very cheap prices, they have a more cyclical profile that can benefit from an economic recovery, and they have better prices when rising held up better than expected. of fuel and the war in Ukraine…
There are numerous opinions supporting the potential of the European stock market. Roberto Scholtes, head of strategy at Singular Bank, explains when it comes to investing in stocks: “We prefer a moderate overweight in Europe and Japan over the US and emerging markets.” Helen Jewell, investment director for fundamental equity market research at BlackRock, believes there are several factors that can boost businesses in the European Union. “There will continue to be major public investment to drive the decarbonisation of the economy, which will benefit many sectors.” It also highlights that there will be UK companies specializing in collecting and marketing data and providing services due to this the rise of artificial intelligence will be in high demand.
Fabiana Fedeli, investment director at manager M&G Investments, also points out that “looking ahead to 2024, stocks in the United Kingdom and continental Europe have more attractive valuations than those in the United States as a whole, following the strong rises in indices in 2023.” ″.
Most of these deliberations took place late last year or early January. But in this first month of 2024, now coming to a close, the stalwart North American stock market has once again prevailed. The S&P 500 has broken through its all-time highs and is already up nearly 3.5%, while European stocks are questionable. As usual. The Stoxx 600 index is up just over 1%.
Reasons for the divergence
For the experts at the giant Capital Group, the factors that explain Wall Street's long decoupling from Europe are “the fall in interest rates, profit growth and innovation, which have led to a sharp increase in stock market metrics.” This argument is reflected in the strong momentum of American technology companies, which has been crucial this January, in 2023 and over the last decade. The Magnificent Seven (Microsoft, Apple, Amazon, Alphabet, Nvidia, Meta and Tesla) have been astounding the world for years with an unprecedented ability to generate revenue and profits.
These seven companies have a market capitalization of more than $10 billion. A value similar to the sum of the 500 European listed companies. The total revaluation since 2019 was 503% (48% annually). Microsoft has once again regained the title of most valuable company in the world thanks to its commitment to artificial intelligence with the purchase of 50% of OpenAI, the company that founded ChatGPT. Apple has built a strong foothold in consumer technology and is making more and more money from businesses like data storage, as is the case with Amazon. Only Tesla seems to be giving in to the unstoppable pull of these titans.
Ron Temple, director of market strategy at Lazard, points out: “Europe's problem is that it doesn't have technology companies as powerful as in the United States.” The only company that shows the most interest in artificial intelligence in terms of price is the Dutch company ASML. It is the undisputed leader in the production of lithography machines for printing microchips. The giants of this technology, the Taiwanese TSMC, the Korean Samsung and the American Intel, are the customers of the European company, which recorded a surge in orders in the last quarter. But the ASML case is somewhat isolated.
Looking at the performance of North American stocks overall, Temple warns that the US presidential election could add significant volatility to this market. “Assuming Trump is finally the Republican nominee and beats Biden, will he violently cut taxes again like he did in his first term? This could benefit companies, but it could also lead to investors fearing about the sustainability of their national debt and triggering a crisis, a risk that we cannot rule out.” The expert working in New York believes the level of federal debt is unsustainable.
Donald Trump, former President of the United States and aspiring Republican candidate in the 2024 elections. MIKE SEGAR (Portal)
The chances that Donald Trump will ultimately become the Republican candidate are very high. More after Ron Desantis' resignation last Sunday. But “we must remember that there are many criminal cases pending against the former president and this may have an important impact on the election campaign. “I don’t think we should be so quick to rule out the other candidate, Nikki Haley,” he emphasizes.
From Axa Investment Managers they refer to another derivative. Trump's potential re-election would have implications for geopolitical events, “with a possible return to trade wars as well as questions about support for Ukraine and Israel,” argues David Page, the firm's head of macro research. In the end, Trump's return could be worse for Europe than for the United States.
The European Parliament (May) and UK elections (expected in October) are also likely to have important local impacts. This year, more than half of humanity is called to vote; elections are also taking place in India, Mexico…
Meanwhile, the U.S. economy continues to resist interest rate hikes with a stoicism that surprises experts. This week it was announced that gross domestic product (GDP) grew by 0.8% in the fourth quarter of 2023 and by 2.5% for the full year. All experts expected that the drastic interest rate hikes promoted by the Federal Reserve (the US central bank) would ultimately destroy the North American economy, but the momentum of consumption and the savings accumulated during the pandemic have brought about the miracle of a soft landing.
For Fabiana Fedeli of M&G Investments, doubts about what will happen to the macroeconomy will lead to greater dispersion in the performance of stock markets. “Therefore, we recommend that our customers focus on long-term structural issues such as innovation, artificial intelligence, infrastructure and the decarbonization of the economy.”
The role of central banks
Ultimately, a crucial factor will be when the Federal Reserve and European Central Bank (ECB) begin cutting interest rates. Many are predicting the first cuts in the first half of the year. Both Jerome Powell and Christine Lagarde have cooled things down. They don't want to rush anything and will wait until inflation is completely under control.
Lucía Gutiérrez-Mellado, strategy director at JP Morgan Asset Management in Spain, recalls: “When inflation is between 2% and 3%, the US stock market typically rises by almost 14% annually; It’s not that it has to be this way this time, but controlled prices and future interest rate cuts are a good environment to invest in stocks.”
Regarding investment opportunities, Capital Group highlights companies that will benefit from the emergence of artificial intelligence (mainly North American), as well as companies specializing in tourism and travel, “companies that are at the forefront of pharmaceutical innovation, especially when it comes to anti – Anti-obesity drugs”, as is the case with the Danish Novo Nordisk or the American Eli Lilly. As well as companies that contribute to “electrification and the global increase in demand for air conditioning,” which will benefit electrical infrastructure operators such as Red Eléctrica, the French RTE or the Italian Terna.
Experts also mention European banks that have ambitious share buyback programs and will continue to benefit from a high interest rate environment. Perhaps the luxury sector with companies like LVMH, which could benefit from the reactivation of the Chinese economy. Maybe, maybe, maybe…but in the meantime, the Magnificent Seven continue to spread the word from Wall Street.
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