Welcome to the primary Free Lunch on Sunday. I’m Tej Parikh, the FT’s economics editorial author, occasional columnist and Alphaville blogger.
Economists, buyers 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? Properly, 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 firms actually that unhealthy? Listed here are some counterpoints:
The case for European shares
America’s S&P 500 is within the midst of a synthetic 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 a number of 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 consists of 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 means, European equities clearly have an underlying enchantment. The place is it coming from? Goldman Sachs calls the continent’s dominant listed firms “the Granolas”. The acronym covers a various group of worldwide firms spanning the pharmaceutical, shopper 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 lately 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 global 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 firms are aggressive throughout sectors, together with in tech: Glencore, Siemens Vitality, Airbus, Adidas, Zeiss and SAP to call a number of.
Small listed European companies additionally are inclined to outperform their American counterparts. About 40 per cent of US small caps have detrimental 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 firms. (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. That will encourage longer-term company governance in Europe, but in addition 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 firms 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 firms with sizeable US gross sales.
In sum, the stellar returns of the US inventory market don’t imply that European firms aren’t any good. Reasonably, buyers are prepared to pay a premium to get publicity to AI (and Trump 2.0) — one that’s trying more durable to justify.
Apart from the worth proposition, there are catalysts that will lure extra buyers 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 firms make quite a lot of their cash outdoors Europe, there’s a home upside, too.
First, the European economic system has arguably proven agility and resilience within the face of unprecedented shocks, as an 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 pc tools have picked up the slack from automobile 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 very least 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 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, modern and tech benefit is unquestionable. And whether or not Europe can truly execute vital 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 very least, had under-appreciated. The continent has numerous, resilient and worldwide firms with established use instances (whereas AI remains to be in search of one). That’s a strong platform for buyers 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? An interesting 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 flexibility of our economies to completely harness the advantages of rising longevity.
