European stocks have been relatively unloved in recent times as the roaring US market has pulled in a flood of cash from investors around the globe.
Inflation prompted relatively high interest rates in the eurozone, hampering share prices. The tide is turning on that front now. Cuts by the European Central Bank may offer a tailwind to the asset class soon.
From German car giants to French luxury goods makers and Swiss banks, European stocks have a lot to offer investors.
In this article we cover:
Read more: Is now a good time to buy US shares?
Which nations do European stocks as an asset class encompass?
The asset class is comprised of a collection of very different countries including Germany, France, Switzerland, Spain, Italy, Sweden, Denmark, Finland, Belgium and the Netherlands. Exact definitions vary.
Essentially, it is the developed economies within continental Europe. UK shares are generally considered a separate asset class, particular by UK investors. However some Europe-focused funds do include the UK.
Emerging markets within Europe such as Romania are generally excluded from the European equities designation.
Big names
Naturally, with so many large economies sitting within European equities, some of the world’s most successful companies can be found there.
Germany’s industrial giants such as Siemens and Volkswagen Group are among the best known European stocks. France’s LVMH leads the world in luxury goods.
Some of the world’s top pharmaceutical companies are European, most notably Novo Nordisk. The Danish company has been a runaway success since it brought the breakthrough weight loss and diabetes drugs Wegovy and Ozempic to market.
Read more: The Magnificent Seven stocks: Still a great opportunity or overpriced and set to fall?
How well have European stocks performed?
As with the UK, continental Europe has suffered badly in comparison with America’s tech-led market. This is exemplified by the Magnificent Seven tech titans, all of which are American, that have dominated the global stock markets.
Europe makes most of the world’s best cars still, but Tesla stole a march on high-end electric vehicles that will be hard to overturn. Likewise, American names such as Meta Platforms and Alphabet are miles ahead in big data and AI.
The MSCI Europe ex-UK index is one of the most widely referenced benchmarks for the asset class. It has made a gain of 13% over the past year, 10% over three years and 10% over five years.
While this represents a respectable return, it looks very lightweight compared to America’s top indices such as the S&P 500, which has delivered 30% over the past year alone.
Europe also lagged the global market as well of course, given that the US accounts for two thirds of it.
Read more: Should you invest in Japanese stocks?
Will returns on European equities improve?
This is the key question. US equities have proven to be a much better investment over multiple timeframes. Nothing lasts forever though, and different asset classes tend to all have their time in the sun.
There are a couple of reasons for optimism. Firstly, European equities could be characterised as cheap relative to the US. The price to earnings ratio measures the amount of money companies are making relative to their share price. The S&P 500 is at an average price to earnings ratio of 28 times, whereas European stocks are about13 times.
Secondly, China is getting back on its feet economically after the Covid years. Europe is much more dependent on exports to the Far East than America is. Before the pandemic, China’s rising middle class were enthusiastic buyers of European goods, from high-end cars to luxury items such as designer handbags.
Read more: Is oil a good investment?
Rotation
Institutional investors tend to “rotate” some proportion of the billions of pounds they look after from assets considered overpriced to those which look cheap. At some point, large numbers of investors will want to take profit on the huge gains made in US stocks recently. Much of this money will be looking for a new place to go. The degree to which this will occur in the near term is far from clear though.
It is also easy to find reasons to be sceptical that Europe’s companies can mount a fightback. For decades, economic growth in the eurozone has been consistently slow relative to the US. There are demographic challenges too, with an aging population and lower birth-rate.
Labour market laws in some European countries can create hurdles to maximising profits and shareholder returns. Perhaps the biggest concern, however, is the lack of big tech successes. The American tech giants are likely to continue to power ahead. A short term pullback in US stock market will not change the fact that US companies dominate the highest growth industries.
How to invest in European stocks
The first step is to decide between Europe as a whole and Europe ex-UK. There are various different options for both. If you are a UK investor you are likely to already have exposure to your home market and therefore investing in Europe as a whole would effectively be doubling up on an element of your portfolio. Europe ex-UK is therefore likely to serve you better in terms of diversification.
Once you are clear on that aspect, the options are buying individual stocks, investing in ETFs and other passive funds, or snapping up some actively managed funds.
Stock picking versus ETFs
Some investment platforms offer German, French and other continental European stocks directly. Access and fees will vary. Selecting individual stocks soundly requires significant research and knowledge.
ETFs offer a low-cost way to gain exposure to the asset class as a whole. A provider will pull together a broad basket of stocks weighted to represent the asset class accurately. Your returns will closely follow the target market as a whole.
Read more: What are ETFs and are they a good investment?
The other option is an actively managed fund. For a fee, a team of fund managers and analysts will comb a specified market to identify what they consider the best stocks to own. An active fund can outperform the asset class as a whole, or lag it, depending on how good a job the managers make of it.
Read more: Is now a good time to buy UK shares?
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
