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 trade faces a number of headwinds. It leaves a picture of Europe as a company has-been. Are the continent’s corporations actually that unhealthy? Listed below 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 all the 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 principally handed the continent by.
However right here’s one thing for perspective. Take Nvidia out of the S&P 500 and its whole returns underperform the eurozone’s inventory benchmark since this bull market started in late 2022.
There are just a few interpretations of this datapoint. First, the S&P 500’s bull run principally displays a wager on AI (notably Nvidia). Second, regardless of much less tech publicity and a slow-growing economic system, eurozone shares have really 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 approach, European equities clearly have an underlying attraction. The place is it coming from? Goldman Sachs calls the continent’s dominant listed corporations “the Granolas”. The acronym covers a various group of worldwide corporations spanning the pharmaceutical, shopper and well being sectors. Collectively, they account for about one-fifth of the Stoxx 600.
Their efficiency towards the Magnificent Seven has solely just lately diverged. The S&P 500 — which has round 70 per cent income publicity to the US — acquired 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 worldwide specialist in chip design. Nestlé is a world 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 hard 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 corporations are aggressive throughout sectors, together with in tech: Glencore, Siemens Power, Airbus, Adidas, and Zeiss to call just a few.
Small listed European companies additionally are inclined to outperform their American counterparts. About 40 per cent of US small caps have destructive 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 corporations. (This shouldn’t detract from real scaling challenges in Europe.)
European corporates additionally rely extra on relationship-based, illiquid funding, not like within the US, the place listed fairness dominates. That will encourage longer-term company governance in Europe, but additionally 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 risk, it’s not all catastrophe for European corporations 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 yr, outperforming European friends, regardless of Germany’s lacklustre economic system.) A stronger greenback would additionally enhance the earnings of European corporations with sizeable US gross sales.
In sum, the stellar returns of the US inventory market don’t imply that European corporations are not any good. Slightly, buyers are keen 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 corporations make plenty of their cash exterior 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 illustration by pivoting away from low cost Russian vitality. Whole manufacturing manufacturing is essentially unchanged because the starting of Trump’s first time period (pharma and pc gear 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 least resulting in a extra encouraging discourse on reforms. There’s rising consensus on the necessity for a real capital markets union to drive scale, deregulation to assist innovation, a extra pragmatic method 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, progressive and tech benefit is unquestionable. And whether or not Europe can really execute essential 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 least, had under-appreciated. The continent has numerous, resilient and worldwide corporations with established use instances (whereas AI continues to be on the lookout for one). That’s a stable 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 an important demographic statistic. However what if we’re fascinated by it wrongly? An enchanting working paper finds that chronological age is an unreliable proxy for physiological functioning, given huge variations in how ageing unfolds throughout individuals. The authors reckon our linear view of ageing may restrict the flexibility of our economies to totally harness the advantages of rising longevity.
