As the rally in US equity markets continues, investors are increasingly looking at opportunities in Europe to see if they offer better value. In fact, some parts of Europe have done really well over the last 12 months, with the German DAX index up 20.6%, the French CAC 40 index up 16.8% and Spain’s IBEX 35 index up 21.2%.
However, broader Eurozone indices (which cover large cap stocks from up to 17 countries) such as the STOXX 600 or S&P Europe 350 are only up by around 11.7%. This compares to the US market’s performance of 13.7% for the S&P 500 or 25.3% for the NASDAQ.
1 Year Performance of Major European Indices to 21/7/17 (local currency)
Over the long term, Eurozone sharemarkets have generally tracked the US market, and up until 2009, had pretty much matched the performance of the US. Post the GFC, Europe (in light blue) has noticeably lagged the US (in red), as the following chart from the RBA (which uses a common base of 100 and logarithmic scale) makes clear.
So, what’s the case for investing in Europe? Well apart from the fact that it has lagged the USA, consider these other factors:
- The European Commission has upped its forecast for euro area GDP growth. In its Spring 2017 forecast (published in May), it says that it now expects GDP growth of 1.7% in 2017 and 1.8% in 2018;
- For the first time in many years, the Purchasing Managers’ Indices are positive (that is, above 50);
- Unemployment continues to fall and is forecast to fall further. As it is still coming off very high levels, this means that there won’t be any demonstrable labour capacity issues for some time;
- The political environment has stabilized, particularly following the strong showing of President Macron’s team in the French parliamentary elections in June;
- Interest rates remain at emergency levels, and while European Central Bank President Mario Draghi would like to sound hawkish on rates, any increase is probably some way off yet; and
- Peter Switzer shared his insights following a recent sojourn to Italy – you can read it here [1].
For investors looking to build global exposure, Europe is arguably too big to ignore. While the USA dominates global equity markets, with 53% weighting global indices such as the MSCI ACWI, Europe and the UK together come in second place at 22%. This is the current country breakdown:
MSCI ACWI Index – Country Weights
The Markets
Before moving on to how to invest in Europe, let’s do a quick re-cap on the major markets and their representative indices.
a) The DAX
Founded in 1988, the DAX is based in Frankfurt, Germany. It consists of 30 blue chip German companies trading on the Frankfurt Stock Exchange, as set out in the table below
DAX 30 Companies
The DAX has risen by more than 2,000 points in the last 12 months, and almost doubled over the last five years.
DAX 30 Index – 7/12 to 7/17
Source: Bloomberg
b) The FTSE 100
Founded in 1984, the FTSE 100 index is made up of 100 blue-chip stocks listed on the London Stock Exchange (LSE). Because the LSE is a global exchange where many international companies maintain a listing, the FTSE 100 includes a number of international companies such as Shell, BHP and Rio Tinto, as well as major local corporates such as Barclays, GlaxoSmithKline, HSBC, Lloyds, Rolls-Royce and Tesco. Accordingly, it is not a pure representative of the local UK economy. A more domestically focussed index is the FTSE 250, which consists of the next largest 250 companies outside the FTSE 100. FTSE stands for the Financial Times Stock Exchange.
FTSE 100 Index – 7/12 to 7/17
Source: Bloomberg
c) Other Country Indices
d) Composite/Pan European Indices
The two better known indices are the STOXX 600 and the S&P 350. The STOXX 600 is made up of 600 large, mid and small companies across 17 countries in Europe including: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Stocks from the UK make up almost 28% of the index, with France coming in second at 16.3%.
STOXX 600 – Country Weights
Although the STOXX 600 has its own sector and super sector weightings, we can compare the index to the Australian market using their equivalent GICs sector weightings. This is shown in the table below. One sector that is a lot higher than Australia is Information Technology at 4.9%. However, it is still considerably less than the 22.3% weighting in the US S&P 500.
GICs Sector Weightings – STOXX 600 vs S&P/ASX 200
Sources: BlackRock and S&P Dow Jones Indices
Finally, the following table shows the top 10 stocks in the STOXX 600.
Source: Stoxx
How to invest
One option is to invest directly in some of the great European companies. If this doesn’t suit you, and you’re after a diversified exposure, then an exchange traded fund (ETF) may be the best alternative. ETFs are passively managed, usually low cost, and track an index. Unfortunately, there are no ASX-listed investment companies or actively managed listed funds that offer exposure solely to Europe.
There are six ETFs that offer exposure to Europe and they are listed in the table below.
* Plus other costs as detailed in the PDS
My inclination would be to stick to one of the ETFs that tracks a broad-based index – so either IEU or VEQ.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.