Hot Stoxx summer
Despite strong US market performance driven by AI and tech stocks, European stock markets have been quietly delivering comparable returns with better valuations, higher dividends, and diversification benefits. Hosts Katie Martin and Ian Smith discuss why European equities remain underappreciated by global investors despite solid earnings growth, strong flows, and record highs in indices like the FTSE 100 and Stoxx 600.
Summary
Katie Martin and Ian Smith examine the divergence between investor attention and actual market performance between US and European equities. While US markets have dominated headlines through spectacular earnings (30% earnings per share growth excluding equity investments) and record highs fueled by the AI narrative and big tech dominance, European stock markets have been performing comparably well but receiving minimal attention.
The hosts outline several reasons for Europe's underperformance in capturing investor mindshare. Historically, European stock markets have been dominated by legacy sectors like commodities, banks, and pharmaceuticals, while US markets evolved to tech dominance. Asian investors have largely ignored European stocks for decades due to lack of earnings growth, with some requiring educational "Gateway to Europe" programs from asset managers like DWS to understand European investing basics.
However, the performance data tells a different story. The FTSE 100 is up 9% year-to-date at record highs, the Stoxx 600 pan-European index is up 11% (nearly matching the S&P 500's 13%), and individual European countries show strong gains (Italy +20%, Spain +17%). In euro terms, European stocks have outperformed the S&P since the start of last year. Goldman Sachs research highlights 14% first-half earnings per share growth for the Stoxx 600—the best start to a year since 2022.
The hosts identify several structural advantages of European equities: they offer diversification from US tech concentration through strength in banks (outperforming the Magnificent Seven since 2022 despite trading at discounts to book value), energy stocks (benefiting from geopolitical concerns), pharmaceuticals, and defense sectors (benefiting from increased government spending). European stock dividends are substantially higher than US yields (which have fallen to near 1%), and valuations are considerably cheaper than US stocks.
Flow dynamics have also shifted positively. European markets are on track for one of their best years in a decade for inflows, driven by investors seeking diversification from concentrated US tech exposure and higher dividend yields. However, challenges remain including Middle East conflict risks affecting energy-dependent Europe, potential fiscal pressures in major economies heading into 2025 elections, and the need for structural reforms outlined in Mario Draghi's report to make European markets more competitive.
A critical structural issue is the estimated two trillion euros sitting in European bank deposits earning minimal returns, which represents untapped investment potential if European investors can be convinced to move from deposits into stocks—something Americans do more readily than traditionally risk-averse European investors.
About this episode
<p>It’s been a hot summer, and not just in terms of weather. European and UK equities markets have matched US returns and are at record levels. Today on the show, Katie Martin talks with senior markets correspondent Ian Smith about the surprising returns for the old world. Also they go long Wetherspoon pubs and long implied volatility. </p><br /><p>Save 10% on tickets to the London FT Weekend Festival with the code FTPodcast. Visit <a href="http://ft.com/festival" rel="noopener noreferrer" target="_blank">ft.com/festival</a> to find out more.</p><br /><p>For a free 30-day trial to the Unhedged newsletter go to: <a href="https://www.ft.com/unhedgedoffer" rel="noopener noreferrer" target="_blank">https://www.ft.com/unhedgedoffer</a>.</p><br /><p>You can email Robert Armstrong and Katie Martin at <a href="mailto:[email protected]" rel="noopener noreferrer" target="_blank">[email protected]</a>.</p><br /><p><br /></p><hr /><p style="color: grey; font-size: 0.75em;"> Hosted on Acast. See <a href="https://acast.com/privacy" rel="noopener noreferrer" style="color: grey;" target="_blank">acast.com/privacy</a> for more information.</p>
Key Insights
- The hosts argue that European stock markets have delivered comparable performance to US markets (Stoxx 600 up 11% vs S&P 500 up 13% year-to-date) while receiving disproportionately less investor attention because the AI narrative acts as an overwhelming focal point that obscures other investment opportunities.
- Ian Smith presented Goldman Sachs research showing European equities achieved 14% first-half earnings per share growth for the Stoxx 600, the best start to a year since 2022, contradicting the narrative that European companies lack earnings momentum.
- Katie Martin explained that Asian investors historically ignored European stocks for rational reasons (no earnings growth for a long time) but are now seeking educational programs to understand European investing, suggesting a fundamental shift in investor sentiment toward European markets.
- The hosts identified that European banks have massively outperformed US tech stocks (the Magnificent Seven) since 2022 because rising interest rates created more profitable lending environments, demonstrating how macroeconomic shifts can advantage entire European sectors that were previously beaten down.
- Katie Martin noted that approximately two trillion euros sitting idle in European bank deposits represents a massive untapped pool of potential investment capital, with the challenge being cultural—convincing traditionally risk-averse European investors to move from deposits into equity markets like Americans do more readily.
Topics
Transcript
Pushkin. We've been in earnings season when companies that are listed on the stock markets tell the world how they're performing and give us a sense of what lies ahead. US earnings have been pretty spectacular helping the US stock market to crack out some record highs after a pretty long period of dawdling around going nowhere. So American exceptionalism, baby, back in the game. Go, go, go. All fuelled by the miracle that is big tech and the AI trade. OK, fine. But quietly, you know what? Europe is having a great run. It's comfortably keeping pace with the US stock market performance despite the lack of tech superpowers and the lack of that chest-thumping bravado that we get…
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