It is almost taken for granted that European share market always underperform other major markets like the US.
If we split the returns of the European and the US market using the key investable benchmark, MSCI Europe and the Standard and Poor’s 500 (SPY ETF) decade by decade over the last 50 years. The US market has beaten the European markets handily in total terms over this period. The last time European markets outperform the US market was in the 1970s.
MSCI Europe vs S&P 500
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What will happen to European Share Market?
One investment thematic which is turning our head is from the relative effective management of Covid-19 on the wider continent vs the US where it is still ravaging the country will be an catalyst for Europe to do better than the US going forward.
We think the ineffectual management of the virus will cause severe structural damage to the United State’s economy and will hamper economic growth for the short and medium term. As long as the mismanagement of the spread of the virus exists we will take advantage of the recent rally in the market to sell.
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The US market return to date has handily outperformed the rest of the world but we don’t think this will last given the spread in the damage caused by the virus will flow to the economic performance in the near future.
The biggest winner from this is trend will be the global Japanese and European companies which has the advantage of home country stability to take market share from their US rivals in overlapping markets.
As result of this we are increasingly turning bullish to international equities excluding the US.
The underperformance of the European market in absolute terms vs the US can bee seen in the chart from Goldman Sachs Investment Research.
One of the major reason for this is the overwhelming outperformance of the US tech sector. As technology earnings has outpaced the rest of the world and Europe being underweight tech and over traditional sectors like autos, industrial and financials means that the overall market has lagged the US equities in the last 2 decades.
We think there is a mean reversion play in that will play out. The technology sector has outran the fundamentals and even showing signs of the second tech bubble.
We see better value in the production of physical goods and services. That is not to say the secular growth in the technology sector is over but we think there is real cyclical correction and Europe should outperform in that scenario.
Where to invests in Europe?
We still rank Germany as our preferred market due to the relative size, political stability and focus on economic development either internally or externally in the support of its global champions. Although this record is not perfect recently with the fraud at Wirecard.
We’ll be going through the list of largest German companies to find some ideas in the near future in preparation after the next sell off.
We think we can’t cover the wider region effectively given the size and time constraints so perhaps using index fund could be a good idea for a macro allocation in our portfolio in addition to some specific stock ideas.
In addition to different investable markets the region can be further separated in terms of risk spectrum between Developed and Emerging Markets. The Central and Eastern European countries has benefited from the greater integration within the Eurozone and adoption of the Euro.
Some of these markets still have greater potential and growth runway compared to the traditional Developed market (i.e Poland and Czech Republic). Although we are cautious to avoid Russia and Hungary. European emerging market is an area we will have to do more research on but there is some legs for expansion here.