Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There’s an old line about those who can see a bandwagon have already missed it. In the case of Europe’s stock markets, which are becoming an exciting investment destination, that’s only partly true.
Investors in Europe are enjoying a rare moment in the sun. The region’s blue-chip stocks have risen 9 per cent this year, while their US peers have fallen almost 4 per cent. Should this outperformance continue, it would make for a historical oddity. Only four times since 2008 has the Euro Stoxx 600 ended December ahead of the S&P 500.
Fund managers are getting interested, though cautiously. Allocations to Eurozone stocks have reached their highest in more than three years, according to Bank of America’s monthly survey. And the charge is being led by solid industrials such as Thyssenkrupp and 136-year-old Rheinmetall, spurred by Germany’s plans to invest up to €1tn in infrastructure and military equipment.
It helps too that Europe’s new growth story is coinciding with a stumble, or worse, by the US. America’s economy is slowing while the Trump administration’s chaotic policymaking, particularly on tariffs, has sapped confidence in the future of the much-vaunted “US exceptionalism”.
European stocks can rally further if the region continues to shed its image as an unloved economic backwater. The Stoxx 600 trades on 14 times forecast earnings, up from 13 in December. Its average multiple is about 16 over the past decade, versus 20 for the S&P 500. If the Stoxx index were to hit its average tomorrow, it would be worth 8 per cent more than it is now — a nice gain, but not outstanding.
For Europe to do significantly better than that, high-minded government targets need to translate into the actual orders, deliveries and payments that drive corporate profits over several years. Analysts are sceptical for now, forecasting Stoxx members’ earnings will rise 3 per cent this year and 9 per cent in 2026, compared with 10 per cent and 13 per cent for S&P 500 shares.
Tellingly, BofA’s investor survey also showed that — while investing more in Europe and selling US holdings — investors also parked a chunk of those US profits in cash. That suggests they need more convincing that this ageing, indebted region with complex politics really is the next big investment destination.
It may be tempting for bank salespeople peddling stocks to their clients to shift the “exceptionalism” tag eastward. Europe does not yet deserve it.
https://www.ft.com/content/95a4a8f5-05c1-4cd5-9923-d2efe2a34581
