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 economic system. On this publication I’ll take a look at them by presenting alternate narratives. Why? Effectively, 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 trade faces a number of headwinds. It leaves a picture of Europe as a company has-been. Are the continent’s corporations actually that unhealthy? 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 your complete 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 whole 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 wager on AI (significantly Nvidia). Second, regardless of much less tech publicity and a slow-growing economic system, eurozone shares have truly carried out fairly properly. (The “S&P 499” nonetheless contains the six remaining “Magnificents”).
Charles Schwab’s chief world 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 attraction. 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, client and well being sectors. Collectively, they account for about one-fifth of the Stoxx 600.
Their efficiency in opposition to 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 — obtained 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 world meals staple.
They didn’t finish 2024 properly. Novo Nordisk’s newest weight problems drug had “disappointing” take a look at 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 world publicity, low volatility and robust earnings — and a few at the moment are undervalued.
However Europe is greater than the Granolas. Different corporations are aggressive throughout sectors, together with in tech: Glencore, Siemens Power, Airbus, Adidas, Zeiss and SAP 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 damaging 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, not like 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 12 months, outperforming European friends, regardless of Germany’s lacklustre economic system.) A stronger greenback would additionally enhance 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 aren’t any good. Quite, traders are prepared to pay a premium to get publicity to AI (and Trump 2.0) — one that’s wanting more durable to justify.
Aside from the worth proposition, there are catalysts which 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 numerous their cash exterior Europe, there’s a home upside, too.
First, the European economic system has arguably proven agility and resilience within the face of unprecedented shocks, for example by pivoting away from low cost Russian vitality. Whole manufacturing manufacturing is basically unchanged because the starting of Trump’s first time period (pharma and laptop tools 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 deal with the bloc’s subdued productiveness progress is a minimum of resulting in a extra encouraging discourse on reforms. There may be rising consensus on the necessity for a real capital markets union to drive scale, deregulation to assist innovation, a extra pragmatic method 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, revolutionary and tech benefit is unquestionable. And whether or not Europe can truly execute necessary 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, a minimum of, had under-appreciated. The continent has numerous, resilient and worldwide corporations with established use instances (whereas AI remains to be in search of one). That’s a strong platform for traders to take advantage of — and for policymakers to construct on.
What do you suppose? Message me at freelunch@ft.com or on X @tejparikh90.
Meals for thought
Age is a crucial demographic statistic. However what if we’re serious 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.
