Investment opportunities in European markets: beyond prejudices

What Are European Stock Exchanges Really?

Many people believe there is a single “European stock exchange,” but the reality is different. European stock exchanges operate as a decentralized network of national and regional markets, each with its own regulations and characteristics. From the London Stock Exchange to Euronext, including Frankfurt Stock Exchange and SIX Switzerland, these markets operate independently but interconnected, allowing investors to buy and sell shares of companies listed in the European Union and the continent.

The key to understanding movements in European stock exchanges is to recognize that they are not isolated entities but interdependent ecosystems influenced by the European Central Bank’s monetary policy, eurozone economic growth, geopolitical events, and global trade trends, especially relations with China and other major trading partners.

Main Indices: Your Map to Navigating European Stock Exchanges

Instead of tracking hundreds of individual companies, investors use stock indices as a compass. These indicators reflect the overall performance of the most important stocks in each market.

DAX 40: The Pulse of the German Economy

The DAX 40 represents the 40 largest and most liquid companies on the Frankfurt Stock Exchange, serving as the main indicator of economic health in Germany, Europe’s largest economy. Its composition includes giants like Siemens, Volkswagen, Adidas, Mercedes-Benz, and Deutsche Bank. This index is closely watched by global investors as a thermometer of European industrial performance.

FTSE 100: The UK Liquidity Benchmark

With the 100 largest companies on the London Stock Exchange, the FTSE 100 accounts for approximately 80% of the total market value of the LSE. Notable components include AstraZeneca, Unilever, Vodafone, BP, and Rio Tinto. While offering excellent liquidity and diversification, this index faces risks from currency fluctuations and geopolitical exposure, as evidenced by its negative performance of -1.27% in 2023 due to the UK’s economic difficulties.

Euro Stoxx 50: Pan-European Diversification

Tracking the 50 leading companies of the eurozone, the Euro Stoxx 50 covers 11 countries and multiple sectors. Its portfolio includes names like Airbus, LVMH, TotalEnergies, ASML, and Santander. With a return of 6.45% in 2023, this index provides balanced exposure to the European economy and is ideal for those seeking sector diversification.

IBEX 35 and CAC 40: The European Emerging Markets

The IBEX 35 led performance with a 9.72% increase in 2023, reflecting strength in the Spanish market with companies like BBVA, Inditex, ArcelorMittal, Iberdrola, and Repsol. The French CAC 40 reached 5.29%, grouping companies such as BNP Paribas, L’Oreal, Renault, and Stellantis.

Current Economic Outlook: Three Key Trends

Falling Inflation but Persistent Interest Rates

European central banks have successfully reduced inflation significantly through interest rate hikes. However, rates remain high, maintaining pressure on tech valuations but benefiting the financial sector. This situation also negatively impacts growth prospects across different European countries unevenly.

Economic Activity Shows Signs of Weakness

Manufacturing and services PMI indices in the eurozone and UK are below 50, a classic sign of contraction. Europe faces uncertainty over whether it will experience a soft landing or a deeper recession, worsened by post-COVID complexities and the conflict in Ukraine.

Employment Remains Resilient

Despite challenges, the unemployment rate in the eurozone reached 6.4% in summer, a historic low, and wages are growing at 4.6% annually, outpacing inflation. This labor strength should sustain consumer spending, offering some stability in a volatile economic environment.

European Stock Exchanges Are Transforming: Real Opportunities

Evolving Sector Composition

Since 2010, European stock exchanges have undergone profound changes. The technology sector grew from 2.9% to 6.7%, industrial from 11.3% to 15%, and health from 9.7% to 16.1%. These changes reflect the continent’s modernization and open new investment opportunities, although still insufficient to compete with Wall Street in this regard.

Companies like ASML (valued at 215.9 billion euros), specializing in lithography for semiconductors, exemplify European potential. With operations in Japan, South Korea, Taiwan, China, and the US, ASML strategically positions itself in the global chip war.

Greater Diversification than the US

Here’s the crucial point: European stock exchanges have a more balanced composition than their US counterparts. While technology accounts for nearly 30% of the US market, in Europe it only reaches 6.7%. This diversification reduces sector risks and provides stability through indices, avoiding overexposure to any single sector.

58% of Global Revenues

Almost three out of five euros of revenue for listed European companies come from outside Europe. In 2023, only 42% of revenues were domestic, while North America contributed 26% and Emerging Markets 25%. This global exposure makes European stock exchanges vehicles for international investment.

Attractive Valuations in Multiple Sectors

As of September 2023, 7 of the top 10 sectors in European stock exchanges are trading below their 10-year average P/E ratio. This includes communications, consumer discretionary, consumer staples, energy, financials, materials, and utilities.

This slowdown presents an opportunity: many sectors are undervalued, waiting for Europe to complete its monetary tightening cycle. If the region achieves a soft landing, these valuations should normalize upward.

Is It Worth Investing in European Stock Exchanges Now?

Recent expert analysis makes it clear: Europe’s valuation discount compared to global markets, especially the US, should narrow. Prejudices about European opportunities persist, but the facts tell a different story.

Risks exist: geopolitical conflicts in Ukraine and the Middle East, uncertain economic cycles, currency fluctuations. But attractive valuations, sector diversification, labor strength, and global exposure create an environment where investors can find real opportunities.

Most analysts agree: it’s time to leave behind previous prejudices about European stock exchanges and evaluate the region with fresh eyes. With interest rate cuts expected in the second or third quarter of 2024, momentum could shift significantly in favor of these markets.