Problems with energy supplies, a perfect storm of geopolitical uncertainty and, in the autumn, probably another Covid flare-up… Investors in European equities are not having it easy, and yet not everything is doom and gloom.
At first glance, there is little reason to be optimistic about Europe and European equities by extension. The enormously weak euro bears witness to the malaise on the Old Continent. Optimists will argue that exporters will benefit, but then the energy supply must be secured, and it is not.
Rationing this autumn is a real possibility. The invasion of Ukraine has caused a landslide in the eurozone, because European growth has been largely based on cheap energy from Russia. Now you can make a cross about that. Prices are going through the roof and a recession is imminent. It has been calculated that German consumers could face a gas bill of as much as 5,000 euro next year. Thank you, Gerhard Schröder.
Meanwhile, Germany, the former stronghold of Europe, is falling into a deep crisis. The country, which used to have a comfortable trade surplus, is now threatening to run into a deficit. Little support can be expected from Germany either.
Shell CEO Ben van Beurden has said Europe faces a “very tough” winter, with a “very significant escalation in energy prices”. In the worst-case scenario, energy will have to be rationed, he said.
Self-sufficient
Meanwhile, the United States is largely self-sufficient in energy or can source energy more cheaply, a major asset in this period.
Independent expert Jan Longeval said it at Investment Officer’s Portfolio Day on 23 June: investors should place the lion’s share of their assets in the US. “Europe faces a shrinking labour force. Both factors will lead to zero growth in the economy. In the US, shareholders’ interests are best served. They also have the demographics to match. That is why you should invest 60 to 80 per cent in the US,” Longeval said.
The US has everything going for it: an economy that is still largely based on “pure” capitalism and “shareholder capitalism”, while Europe is increasingly shifting towards “stakeholder capitalism”. The interests of the shareholder no longer come first. Whether that is a good or bad thing is a value judgement.
European shares
So what is the argument for investing in European shares? The valuation? The table below shows that several European equities are particularly cheaply valued in terms of price/earnings ratio, knowing that the brokers’ estimates will have to be revised downwards, but to a lesser extent than in the US. However, a low valuation is no guarantee of outperformance.
Studies have also shown that European companies are systematically less profitable than American ones, and that they are more often active in sectors linked to or regulated by governments, such as telecoms, banks, and utilities.
The conclusion? Anyone who wants to invest in European companies in a profitable way will have to invest actively and do some good old stock picking. Based on this reasoning, the US market seems to lend itself more to the easy solution: buy the index. But the period when asset allocators allocated the lion’s share of their portfolios to European equities seems to be well and truly behind us. The alternatives - the US and certain emerging markets - have become too convincing.
Jurgen Vluijmans is Editorial Manager of Investment Officer Belgium. This article first appeared on InvestmentOfficer.be.