European Stock Exchange: Opportunities that investors are missing out on

Why Talk About the European Stock Market Now?

For years, many investors have looked toward Wall Street while ignoring the opportunities generated on the other side of the Atlantic. The reality is that the European stock market is not a single market but an ecosystem of national and regional stock exchanges—London, Frankfurt, Paris, Madrid, Amsterdam—that operate under their own regulations but are interconnected. This network of markets includes such prominent institutions as Euronext, the London Stock Exchange, and SIX in Switzerland.

What’s interesting is that the landscape is changing. While many see Europe as a secondary market, data suggests exactly the opposite.

The Current Context: Three Facts That Define the Market

Controlled inflation but persistent interest rates

European central banks have successfully reduced inflation steadily across almost all of Western Europe, but economic growth remains uneven depending on the country. Deutsche Bank data confirms this trend: although inflation is retreating, interest rates will stay elevated for longer. This is a positive sign for the financial sector, although it pressures tech valuations.

Relative economic weakness

Post-pandemic normalization and the situation in Ukraine have created uncertainty about whether Europe will experience a soft or hard landing. PMI indices (both manufacturing and services) in the Eurozone and the UK are below 50, indicating weakness in current economic activity.

Resilient employment and rising incomes

Despite higher interest rates, the Eurozone’s unemployment rate hit historic lows of 6.4% during summer. Annual wage growth is at 4.6%, surpassing inflation. This labor strength should sustain consumer spending, meaning Europe could be the first region to exit the monetary tightening cycle.

The Main Indices: Your Gateway to the European Stock Market

For retail investors, tracking dozens of markets and hundreds of companies is practically impossible. That’s why stock indices exist: weighted groupings by market capitalization that reflect the overall performance of the values in each exchange.

DAX 40: Germany’s thermometer

Represents the 40 largest companies listed on Frankfurt Stock Exchange. With a return of 6.82% in 2023, the DAX 40 is widely followed as an indicator of German economic health. Its composition includes Volkswagen, Siemens, Adidas, Mercedes Benz, and Deutsche Bank. Since Germany is Europe’s largest economy, movements in the DAX 40 often anticipate continental trends.

FTSE 100: Britain under pressure

The London index tracks the performance of the 100 largest market capitalizations in the UK, representing approximately 80% of the total value of the London Stock Exchange (LSE). Companies like AstraZeneca, Unilever, Vodafone, BP, and Rio Tinto are part of it. However, with a negative return of 1.27% in 2023, it has been the worst-performing European index due to the UK’s economic difficulties.

Euro Stoxx 50: Genuine diversification

This index follows the 50 leading companies of the Eurozone, covering 11 countries and multiple sectors: banking, energy, technology, and consumer goods. Its composition includes names like Airbus, LVMH, TotalEnergies, ASML, and Santander. It achieved a 6.45% return in 2023 and serves as the underlying for ETFs, futures, and options.

IBEX 35: Best performance

The Madrid Stock Exchange’s benchmark index tracks the 35 most liquid companies. With a 9.72% return in 2023, it was the best European index (almost on par with the US S&P 500, which gained 9.82%). It includes BBVA, Inditex, ArcelorMittal, Iberdrola, and Repsol.

CAC 40: France in line

Reflects the 40 main stocks of Euronext Paris among the top 100 by market capitalization. Companies like Alstom, BNP Paribas, L’Oréal, Renault, and Stellantis make it up. Its return in 2023 was 5.29%, showing a moderate performance in the European context.

Why Is the European Stock Market an Undervalued Case?

Sectoral transformation is real

Since the 2008-2009 crisis, the composition of the European stock market has changed radically. Between 2010 and 2023:

• Growing sectors: Industrial (11.3% → 15.0%), Healthcare (9.7% → 16.1%), Discretionary Consumption (8.9% → 11.3%), Information Technology (2.9% → 6.7%)
• Contracting sectors: Financial (21.1% → 17.5%), Materials (11.0% → 6.9%), Energy (10.9% → 6.0%), Telecommunications (6.5% → 3.1%)

This rebalancing shows how the European stock market is evolving, albeit slowly.

More balanced than the United States

Here lies a crucial finding: while the tech sector accounts for nearly 30% in the US, it only makes up about 6.7% in the European market. This means no sector has an outsized weight, resulting in more stable and predictable performance. Any sector-specific crisis will impact Europe less than the US economy. For investors seeking stability through indices, this is ideal.

Globalized incomes

Almost 60% of the revenues of companies listed on the European stock market come from outside Europe. While in 2012, 61% came from within Europe, by 2023, this dropped to 42%. The rest comes from North America (26%) and Emerging Markets (25%, including Latin America and Africa). This means you are investing in truly global companies with exposure to worldwide growth.

Attractive valuations across multiple sectors

As of September 2023, seven of the top ten sectors had P/E ratios below their 10-year average. These include telecommunications, discretionary consumption, basic consumer goods, energy, finance, materials, and basic services. This reflects economic slowdown but also creates opportunities: when the region exits the interest rate hike cycle (expected for Q2-Q3 2024), these valuations could compress significantly.

The ASML Case: Why the European Stock Market Has Hidden Gems

Although it’s true that there is no Apple, Google, Meta, or Netflix originating from Europe, that doesn’t mean there are no technological opportunities. ASML, based in the Netherlands and valued at over 215 billion euros, produces advanced semiconductor systems for chip manufacturers worldwide. In times of trade war between the US and China, ASML holds a unique strategic position. This is just one example of how the European stock market hosts companies of global relevance.

The Verdict: Is It Worth Investing?

Geopolitical risks in Europe are significant: war in Ukraine and conflicts in the Middle East affecting the oil market. However, the European economy has maintained strength within its controlled slowdown.

According to experts like Aaron Barnfather of Lazard Asset Management, Europe’s valuation discount compared to global markets, especially the US, should decrease. This paradox likely won’t continue indefinitely. Stock markets can overshoot in their valuations, but corrections eventually happen.

The European stock market offers attractive valuations across multiple sectors, greater diversification than its US counterpart, and companies with genuinely global revenues. All of this, combined with expectations of interest rate reductions in the coming quarters, suggests that investors should reconsider their previous assumptions about the European market.

The question is not whether to invest in the European stock market but when to start doing so.