Credit Impulse Update: France’s best days are already behind us Credit Impulse Update: France’s best days are already behind us Credit Impulse Update: France’s best days are already behind us

The investment case for European equities

Equities 4 minutes to read
Picture of Peter Garnry
Peter Garnry

Head of Saxo Strats

Key points

  • Europe's economy: Investor sentiment is improving, real-time GDP indicators suggest the recession is ending, and lower energy prices are easing pressure on businesses and households.

  • European equities: Not as attractive as US equities strategically, but offer gems with good value and potential for surprise.

  • European defence stocks: Seen as a high growth industry due to the war in Ukraine and Europe's focus on self-reliance.

Green shoots are everywhere

In our recently published Quarterly Outlook we highlighted Europe as the region we like the most tactically in the second quarter. With the momentum in US and Japanese equities many are probably wondering why are bullish on European equities. Let us explain in more details why by going through three macro indicators.

  1. Sentix sentiment reading on Eurozone economy 6 months ahead just turned positive for the first time since February 2022 and is approaching the average levels seen during expansion periods before the pandemic.

  2. Bank of Italy’s eurocoin growth indicator, which is a real-time GDP measure, also went positive in March for the first time since August 2022 indicating that Europe’s economy is coming out of its recession.

  3. Natural gas and electricity prices in Europe are down 34% and 42% from the 2023 average respectively which alleviates pressures for Europe’s industry and households. Lower energy prices will help the going forward.
9_pg_1

European equities are not a wonder market, but there are gems hidden in the mud

While we like European equities tactically and one could talk about low P/E ratio and better sector diversification than US equities, European equities are not as attractive as US equities strategically. European companies have struggled for years to grow their revenue faster than inflation offsetting the attractive combination of 3.1% dividend yield and 1.6% buyback yield. Investors betting on European equities are betting that US exceptionalism cannot continue, not even in technology, and that the low equity valuations reflect so low expectations that Europe can only surprise. How to get exposure to European equities?

The two biggest ETFs on European equities are listed below for those that want broad-based exposure:

  1. iShares Core MSCI Europe UCITS ETF EUR (Dist)
    • AUM is €7.6bn
    • Total expense ratio: 0.12%

  2. Amundi Stoxx Europe 600 UCITS ETF Acc
    •  AUM is €7.2bn
    • Total expense ratio: 0.07%
9_pg_2
Stoxx 600 Index | Source: Saxo

Last year, we wrote a primer on European equities highlighting its different features and where European equities are different from US equities. The five largest industries in the European equity market are health care, industrial goods & services, banks, food beverage & tobacco, and technology. One of the biggest changes from last year is that Nestle is no longer the largest constituent in the Stoxx 600 Index as it has been overtaken by Novo Nordisk as the market pushed the Danish pharmaceutical company higher amid a bonanza for its weight loss drug Wegovy. Another rising star has been SAP that was not part of the top 10 a year ago, but has risen to become the seventh largest stock in the main index.

Underneath the surface of the usual mega caps there is a group of highly profitable and high quality companies that any curious investor should consider. Below we have listed 10 companies with outstanding return on invested capital, the hallmark of operational quality, and outside the mega caps.

  • Rightmove
  • InterContinental Hotels
  • Hermes
  • Kone
  • Sectra
  • Ferrari
  • STMicroelectronics
  • Geberit
  • Inditex
  • Tenaris

European defence stocks are key portfolio component in the years ahead

As we also highlight in our Quarterly Outlook, the European defence industry is going to be a high growth industry for years to come as the war in Ukraine has no end in sight, and Europe is determined to rely less on US defence in the future. Military budgets will continue to rise and most likely exceed current expectations. The list below highlights the stocks in our defence basket. Rheinmetall in particular is the most popular European defence stocks among our clients.

9_pg_3

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.