A tale of two different European equity markets A tale of two different European equity markets A tale of two different European equity markets

A tale of two different European equity markets

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  European equities are down 12% this year whereas US equities are in positive territory and emerging market equities are unchanged. But underneath the bad overall performance a tale of two different European equity markets is hiding showing that a passive approach to European equities that on all measures are extremely cheap is wrong. Investors have to be selective and in our view get exposure to the stable growth companies with high earnings predictability. Those companies will benefit more than others from the low interest rate environment.


In today’s Saxo Market Call podcast, we talked about how emerging market equities had almost fully recovered from the COVID-19 selloff whereas European equities had only recovered half of the drawdown. Asia and especially China is a big component in the emerging market index and the region seems to have managed the COVID-19 outbreak much better with their economic activity also bouncing back faster. As Europe’s rebound was under way a new resurgence in COVID-19 cases seems to be breaking the rebound playbook putting even more pressure on ECB on their Thursday press conference. You can read our ECB preview here.

Source: Bloomberg

Stock picking is crucial as there is no one Europe

Back in May we wrote a research note Have US equities finally peaked relative to European equities? Highlighting the grotesque difference in performance between US and European equities since 2007. Most of the outperformance is related to the facts that US companies are dominating the digital economy in the developed world and that European equity markets were still heavily overweight financials which have suffered in the post Great Financial Crisis period.

Whereas emerging market equities are almost unchanged for the year European equities are still down 12%. But Europe’s performance comes in different shades. As the table below indicates there are basically two groups this year in terms of performance. The best performing group consists of the markets: Denmark, Finland, Sweden, Netherlands, Switzerland, Germany, Portugal and Ireland which are up 1% on an equal-weight basis whereas the other group is down 20% with Austria being hit the hardest down 32% year-to-date.

MarketLargest sector12m Fwd P/EReturn YTD (%)Return 5yr (%)
DenmarkHealth care16.615.646.5
FinlandIndustrials12.75.639.3
SwedenIndustrials13.12.040.9
NetherlandsInformation technology15.6-1.056.1
SwitzerlandHealth care15.5-1.535.7
GermanyConsumer discretionary10.6-2.321.4
PortugalUtilities9.1-6.037.0
IrelandMaterials13.8-6.08.3
NorwayFinancials7.2-11.328.9
FranceIndustrials11.5-13.326.4
ItalyFinancials8.9-16.7-4.9
United KingdomConsumer staples9.3-20.514.7
BelgiumConsumer staples13.7-23.3-17.9
SpainUtilities9.5-24.6-16.6
AustriaFinancials6.9-31.52.1

Source: Bloomberg and Saxo Group

This divergence in performance is also evident in the 5-year total return numbers so this is long-term trend that has persisted indicating the tale of two European equity markets. In terms of 12-month forward P/ E ratio the best performing group has an average ratio of 13.4x which is still low given the low interest rate environment and given valuation of US equities. The worst performing group has a forward P/E ratio of 9.6 indicating very low sentiment for these markets.

Our view is that valuations are very attractive in Europe relative to many other markets but that investors should be very selective and not buy passively into European equities. As we wrote recently earnings predictability drives valuation premium, so we recommend investors to look for stable growth companies in Europe and avoid the cheap cyclicals and especially financials.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

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/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. 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
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992