Welcome to the primary Free Lunch on Sunday. I’m Tej Parikh, the FT’s economics editorial author, occasional columnist and Alphaville blogger.
Economists, traders and journalists all wish to develop neat explanations to assist make sense of the worldwide financial system. On this publication I’ll check them by presenting alternate narratives. Why? Nicely, it’s enjoyable — and since it wards off affirmation bias.
Let’s start with Europe’s unloved equities. We’ve learn advert nauseam about how booming American stocks are leaving their transatlantic counterparts within the mud, whereas European business faces a number of headwinds. It leaves a picture of Europe as a company has-been. Are the continent’s corporations actually that dangerous? Listed here are some counterpoints:
The case for European shares
America’s S&P 500 is within the midst of a man-made intelligence-led increase. The “Magnificent Seven” tech shares make up round one-third of the index, and their market capitalisation surpasses the whole worth of the French, British and German bourses mixed. Tech accounts for round simply 8 per cent of the Stoxx Europe 600. AI euphoria has largely handed the continent by.
However right here’s one thing for perspective. Take Nvidia out of the S&P 500 and its complete returns underperform the eurozone’s inventory benchmark since this bull market started in late 2022.
There are just a few interpretations of this datapoint. First, the S&P 500’s bull run largely displays a guess on AI (notably Nvidia). Second, regardless of much less tech publicity and a slow-growing financial system, eurozone shares have truly carried out fairly effectively. (The “S&P 499” nonetheless contains the six remaining “Magnificents”).
Charles Schwab’s chief international funding strategist, Jeffrey Kleintop, who flagged the above chart, additionally points out that the eurozone’s ahead price-to-earnings ratio trades at a historic low cost to the S&P 500, creating scope for European valuations to rise additional.
Both method, European equities clearly have an underlying enchantment. The place is it coming from? Goldman Sachs calls the continent’s dominant listed corporations “the Granolas”. The acronym covers a various group of worldwide corporations spanning the pharmaceutical, shopper and well being sectors. Collectively, they account for about one-fifth of the Stoxx 600.
Their efficiency towards the Magnificent Seven has solely not too long ago diverged. The S&P 500 — which has round 70 per cent income publicity to the US — bought a jolt following the election of Donald Trump.
They’re no company pushovers. Novo Nordisk produces the in-demand Wegovy weight reduction drug. LVMH is unrivalled amongst luxurious manufacturers. ASML is a world specialist in chip design. Nestlé is a global meals staple.
They didn’t finish 2024 effectively. Novo Nordisk’s newest weight problems drug had “disappointing” check outcomes, LVMH is affected by weak Chinese language demand and difficult macroeconomic circumstances are consuming into Nestlé’s backside line. Nonetheless, they’re established, broad companies with international publicity, low volatility and robust earnings — and a few are actually undervalued.
However Europe is greater than the Granolas. Different corporations are aggressive throughout sectors, together with in tech: Glencore, Siemens Power, Airbus, Adidas, and Zeiss to call just a few.
Small listed European companies additionally are inclined to outperform their American counterparts. About 40 per cent of US small caps have adverse earnings, in contrast with simply over 10 per cent in Europe. The winner-takes-all dynamic could also be stronger within the US, the place tech behemoths suck capital and expertise away from smaller corporations. (This shouldn’t detract from real scaling challenges in Europe.)
European corporates additionally rely extra on relationship-based, illiquid funding, in contrast to within the US, the place listed fairness dominates. Which will encourage longer-term company governance in Europe, but additionally highlights the challenges of evaluating US and European inventory efficiency (the liquid fairness flows aren’t in the identical league).
Relating to the Trump tariff menace, it’s not all catastrophe for European corporations both. Stoxx 600 teams derive solely 40 per cent of their revenues from the continent. (For measure, Frankfurt’s Dax rose shut to twenty per cent final yr, outperforming European friends, regardless of Germany’s lacklustre financial system.) A stronger greenback would additionally increase the earnings of European corporations with sizeable US gross sales.
In sum, the stellar returns of the US inventory market don’t imply that European corporations are not any good. Somewhat, traders are keen to pay a premium to get publicity to AI (and Trump 2.0) — one that’s trying more durable to justify.
Aside from the worth proposition, there are catalysts that will lure extra traders to European shares: disappointing AI outcomes, decrease rates of interest in Europe, Trump dangers and additional stimulus makes an attempt in China.
And, even when its listed corporations make loads of their cash outdoors Europe, there’s a home upside, too.
First, the European financial system has arguably proven agility and resilience within the face of unprecedented shocks, as an illustration by pivoting away from low-cost Russian vitality. Complete manufacturing manufacturing is essentially unchanged for the reason that starting of Trump’s first time period (pharma and pc gear have picked up the slack from automotive manufacturing). So-called peripheral European economies are additionally performing higher.
Then there’s the longer-term home earnings and financing outlook. Although France and Germany face political instability, the rising urgency amongst policymakers to handle the bloc’s subdued productiveness development is at the least resulting in a extra encouraging discourse on reforms. There’s rising consensus on the necessity for a real capital markets union to drive scale, deregulation to help innovation, a extra pragmatic strategy to free commerce and China, a debt brake rethink in Germany, funding in digitalisation and decrease vitality prices. Mario Draghi’s report on European competitiveness has added momentum.
America’s monetary, progressive and tech benefit is unquestionable. And whether or not Europe can truly execute essential reforms is one other matter. But the comparative surge of US shares — given entry to huge liquidity, tech experience and publicity to AI — hides strengths in Europe’s listed companies that I, at the least, had under-appreciated. The continent has various, resilient and worldwide corporations with established use instances (whereas AI continues to be on the lookout for one). That’s a strong platform for traders to use — and for policymakers to construct on.
What do you assume? Message me at freelunch@ft.com or on X @tejparikh90.
Meals for thought
Age is an important demographic statistic. However what if we’re eager about it wrongly? A captivating working paper finds that chronological age is an unreliable proxy for physiological functioning, given huge variations in how ageing unfolds throughout folks. The authors reckon our linear view of ageing may restrict the power of our economies to totally harness the advantages of rising longevity.
