Take A Look At These Charts Before Investing In Europe

seekingalpha09-25

European stocks are cheaper but justified due to structural issues, in my view. I expect continued underperformance compared to U.S. equities.Key issues I see and showcase with charts include falling ...

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I expect continued underperformance compared to U.S. equities.Key issues I see and showcase with charts include falling ...</p>\n\n<a href=\"https://seekingalpha.com/article/4723224-look-at-these-etf-charts-before-investing-in-europe\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Take A Look At These Charts Before Investing In Europe</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nTake A Look At These Charts Before Investing In Europe\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-25 22:18 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4723224-look-at-these-etf-charts-before-investing-in-europe><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>European stocks are cheaper but justified due to structural issues, in my view. I expect continued underperformance compared to U.S. equities.Key issues I see and showcase with charts include falling ...</p>\n\n<a href=\"https://seekingalpha.com/article/4723224-look-at-these-etf-charts-before-investing-in-europe\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4585","symbol_name":"ETF&股票定投概念","start_time":0,"source_url":"https://seekingalpha.com/article/4723224-look-at-these-etf-charts-before-investing-in-europe","article_id":"2470026675","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2035571068/image_2035571068.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2470026675","pubTimestamp":1727273895,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"European stocks are cheaper but justified due to structural issues, in my view. 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I expect continued underperformance compared to U.S. equities.Key issues I see and showcase with charts include falling productivity, lagging innovation, and demographic decline, all exacerbated by an incomplete European Union.I also see Europe's over-regulation stifling innovation, and demographic decline putting pressure on government spending, potentially triggering a new debt crisis.I recommend avoiding broad exposure to European equities via products like the VGK ETF, and instead suggest focusing on specific outperforming countries or carefully selected individual stocks.  Europe from space greenbutterfly Article introduction: all data I see points me to be secularly bearish on Europe. European stocks have been underperforming compared to their U.S. counterparts since the Great Financial Crisis. As an investor, I frequently hear arguments suggesting that this could be a good entry point into European equities, given their relative cheapness and the expectation that their underperformance will eventually reverse.   Europe vs US out/underperformance, Equities (Robeco, MSCI) While I agree that European stocks are cheaper compared to their U.S. counterparts, I believe this discount is justified due to structural issues within the European economy and its companies. As a result, I do not expect European equities to outperform their U.S. peers anytime soon. In fact, I anticipate the performance gap will continue to widen for the foreseeable future. In this article, I will outline why I have a secularly bearish outlook on European stocks, supported by a series of macro charts I have collected over the past few months. I will break down my argument into three key “exhibits”. Afterwards, I will discuss whether I think Europe can fix its issues and outline risks to my thesis. Finally, I will describe the Vanguard FTSE Europe ETF (NYSEARCA:VGK) and why I have a “HOLD” rating on it. While I will share my thoughts on the factors contributing to Europe's economic decline, this is not the primary focus of this piece. Instead, my goal is to explain why I do not foresee European stocks outperforming their U.S. peers in the future. A note about what I mean by “Europe” and the data presented \"Europe\" can be defined in various ways, but for this article, I will focus on a geographical definition that extends beyond the European Union. I will use the STOXX Europe 600 Index (STOXX) as my reference, which includes 600 of the largest and most significant European companies, covering countries outside the EU, such as Switzerland and the UK. While I aim to present data that reflects trends across the entire continent, some data will focus specifically on the Eurozone or individual countries that play a disproportionately large role in Europe's economy, such as Germany. Exhibit 1: Secular fall in productivity I am starting my case by discussing productivity because I find it is the metric that most directly influences the performance of equities. A less productive company generates less output with the same resources compared to a more competitive one. Since stock markets tend to reflect expected future output in the form of Free Cash Flow, I find it reasonable to assume that less competitive companies will underperform their more productive counterparts in terms of stock prices. Non-Farm Productivity, US vs. EU, last 20 years (Financial Times) The gap in productivity between the US and Europe has been widening, as shown in the chart above. The divergence started after the Great Financial Crisis and the trend never recovered. I attribute this phenomenon to many causes, including some - such as lack of innovation - that I will cover in the next exhibits. However, the main cause I see behind this fall is the incomplete state of the European Union and its reliance on an imperfect currency, the Euro. Lira vs. D-Mark, 1971 to 2020 (Michael A. Arouet, Bloomberg) Before the EU, peripheral countries such as Italy used competitive devaluation of their currencies to stay competitive in the European landscape. This is shown by the chart above, showcasing how the Italian Lira was on a secular decline against Germany’s currency, the Deutsche Mark. This phenomenon slowed down in the 1990s, and stopped completely after the introduction of the Euro in 2001. The most known effect of the advent of the Euro concerns peripheral countries like Italy, Spain and Greece. These countries had to find other ways to stay competitive in Europe other than devaluing their currencies. This resulted in their governments over-indebting (resulting in the European Debt Crisis) and real salaries experiencing stagnation or a decline over the long term. A lesser-known effect of the Euro is that it gradually made once highly competitive and innovative countries, like Germany, less productive over time. This occurred because Germany began benefiting from a consistently undervalued currency compared to the former Deutsche Mark. As a result, German companies found it easier to export their products, reducing the incentive to invest in research and development and maintain their competitive edge. Compounded by a series of poor policy decisions during Angela Merkel’s tenure—such as an over-reliance on Russian energy and the dismantling of the nuclear program—this has left German productivity stagnating at mid-2000s levels (as shown by the chart below).   German Productivity, 1960s to 2020s (Kiel Institute, Germany) While the specific reasons for productivity stagnation vary across European countries, the result is clear: Europe today is significantly less productive compared to the U.S. than it has ever been in the past. I do not expect this trend to reverse anytime soon, a point I will cover in more detail in the following sections. Exhibit 2: Europe is losing the innovation race The second element I am covering for my thesis concerns innovation. While “innovation\" can have different definitions, my assumption is that companies introducing fewer new products or services are likely to underperform those that consistently bring more innovations to the market. I believe this assumption holds true at both the company and macro levels—countries or regions that foster more innovative companies and focus heavily on cutting-edge sectors are likely to outperform those that lag in innovation. I find there is a lot of anecdotal evidence of Europe losing its relevance on the world’s stage when it comes to innovation. For my case, I have decided to focus on two metrics: the weight of Technology as a sector in the European stock market and the number of large startups in the Continent.   Market cap by sector percentage, STOXX Europe 60 vs. SP500 (FactSet) I think these two metrics highlight the concerning state of innovation in Europe. Technology accounts for only about 8% of the STOXX Europe 600 Index. In contrast, this sector weighs more than 35% in the S&P 500. I see this as a symptom of European companies not being able to move away from traditional business models. Number of active Unicorns, US, Europe, China (Financial Times, Pitchbook, EU Commission) Additionally, the number of active unicorns (startups valued at $1 billion or more) in Europe is significantly lower compared to both China and the U.S.. In my view, this again indicates Europe's lag in producing high-growth, innovative companies. I believe Europe's lag in innovation is largely due to over-regulation. Over the past decade, European institutions have disproportionately focused on regulating innovation rather than fostering it. This is one of the main findings of the recent ‘Draghi report”, a comprehensive analysis of Europe's challenges, commissioned by the European Commission and led by former Italian Prime Minister and ECB Chair Mario Draghi. I view this obsession with regulation as a consequence of the relative weakness of pan-European institutions compared to their U.S. counterparts. With limited budgets and political capital, European institutions have turned to regulation as a default approach, rather than implementing policies that could truly promote innovation. I will cover this in more detail in a section dedicated to how Europe could fix its structural problems. Exhibit 3: Europe's demographic decline is putting pressure on government spend The final element I am presenting as an exhibit for my bearish case on Europe is the one that is the least directly correlated to the performance of equities. I am talking about Europe’s demographic decline, which is shown in the chart below. Years when the 2021 population was first reached (Vividmaps.com) A demographic decline does not necessarily mean a period of economic stagnation (and equity underperformance). Demography is only one of the variables at play in an economy, impacting labor, consumer and government spend. Other variables, such as productivity, could theoretically more than compensate for a demographic decline. This said, I think demographic decline will play a significant role in Europe, given the stagnant productivity of the area. In particular, I am concerned about the impact that the demographic decline will have in the short to medium term on government spending. To illustrate my point, consider the chart below, showing the percentage of unfunded entitlement for household pensions by country in Europe.   Household pension - funded and unfunded parts EU and EFTA (Eurostat) Most pension systems in Europe have unfunded entitlements for household pensions that are higher than 100% of their GDP. Only Switzerland, Denmark and Iceland are in a better position. Some other countries, such as Norway and The Netherlands, should also be able to face the situation, having practiced fiscal discipline and/or having vast reserves in the form of sovereign funds. However, I see a worrying future for countries such as Italy, Spain or France. These countries are already heavily indebted and running a large fiscal deficit before having to face an explosion in spending to face an increasing amount of retirees. I see the cause of this demographic decline as something that was bound to occur as fertility rates declined over time. This is a problem that is shared by countries outside of Europe, the US included. However, unlike the US, Europe has very low productivity and attracts relatively few qualified immigrants to compensate for its decline in population. More worryingly, Europe has already grown less than Japan in the last 50 years, even if it is behind Japan in terms of demographic decline.   Economic Growth, 1970s to today by Global Region (Financial Times) I think that Europe is likely to (try and) fix the issue in a similar fashion to what Japan did since the 1990s: by printing money, in various shapes or forms. This is what Europe ended up doing following the European Debt Crisis of the early 2010s. The ECB under Mario Draghi decided to “do whatever it takes” to avoid a collapse of the Union. What that ended up meaning, is that the ECB became the lender of last resort of European countries. That situation degenerated during COVID, when the ECB ended up being the only buyer of debt of countries such as Italy. This is shown by the chart below, which I used in a recent Macro article about currency debasing.   Institutions buying and selling Italian bonds, 2004 to 2023 (OMFIF.org) As a result of what I have just shown, I expect Europe to enter a new debt crisis in the mid term. I think this crisis will be more widespread across Europe than what we saw in the early 2010s (since countries such as Germany and France will be heavily affected) and it will be triggered by rapidly raising government spending for pensions. What will happen next is anyone’s guess, but it will come down to the political will of fixing Europe. This is what I will cover in the next two sections. How could Europe fix itself? I believe most of the structural issues that I just presented stem from the same common root: an incomplete European Union. This also explains why countries that have always been outside the EU tend to fare better than those within it. While the EU’s bilateral agreements and regulations heavily influence neighboring non-EU countries, nations like Switzerland and Norway, for example, currently boast higher productivity levels than the U.S. The EU’s common currency creates challenges for peripheral countries, which face a \"handicap\" in the form of a strong euro that hinders their export competitiveness. On the other hand, ‘core’ countries like Germany benefit from a structurally undervalued currency, making their exports easier and reducing the pressure on companies to innovate. In the middle sit countries such as France or Belgium, core to the EU from a political standpoint but also heavily indebted and running a deficit higher than that of many Southern European peers. Sharing a currency isn’t an issue per se. Countries such as the US or Switzerland share a currency despite featuring regions that are vastly diverse in terms of economic strength and geography. States like California and Texas coexist with Alaska or Tennessee in the US. On a far smaller scale, in my home country Switzerland, Cantons like Zurich or Geneva coexist with relatively poor Alpine Cantons that live out of tourism or agriculture. Unlike the US or Switzerland, the EU has very weak supranational institutions and fiscal redistribution mechanisms. The European Union budget is only worth about 1% of GDP. The budget has also remained the same since 1990. This compares with more than a Federal budget of 20% in the US and 10% in Switzerland. Both budgets have fluctuated and slightly grown in the years. While I’m not an advocate for government spending at any level, I see a strong federal budget as a crucial missing element in the European Union. Such a budget could address many issues caused by the common currency, offering support to peripheral countries while putting pressure on core countries, like Germany, that benefit from a chronically undervalued currency, encouraging competitiveness and innovation. I will let readers that are not familiar with EU politics imagine how easy it is to convince Germans or Dutch that sending more of their money to Italy or Spain is ultimately beneficial for their own country in the long run. Even when faced with the evidence of 20 years of stagnation, this remains a hard sell. In addition to a stronger federal budget, I believe other measures, requiring less political capital, could help resolve Europe’s structural issues. These include introducing a common market for services and a banking union, which wouldn’t cost taxpayers but would drive innovation and force national companies to compete on a continental level. However, implementing these unions without a fiscal union in place could prove problematic, as less competitive countries would inevitably suffer from such competition. Ultimately, whether or not the EU will manage to tackle its structural issues depends purely on political will, in my view. This is also the main risk to my thesis, which I will cover in the next section. Risks to my thesis Political risk is very difficult to predict by definition. In the context of my thesis, there is a risk that Europe manages to overcome its political divide and ‘completes’ its Union. This would put Europe back on track, and in the mid and long run would have a positive effect on European equities, triggering a potential period of overperformance against US peers. As a European citizen I give exactly zero chances this will happen in the foreseeable future. I just do not have trust that the long term good of the EU will ever be put before the short term benefit of single nations. However, this is a risk that must be considered. Such a scenario could be triggered by a new debt crisis caused by unsustainable government spending for pensions, as I have outlined previously. Another risk to my thesis concerns the overperformance of some specific geographical areas of Europe. While I personally think EU problems reflect almost 1-to-1 on its neighbors, it is a fact that non-EU countries such as Switzerland have so far fared better than countries in the EU. The performance of the Swiss equity market, which is oversized relative to the country, could be something that investors should consider before deciding not to invest in Europe at all. The same applies to the United Kingdom. The effect of Brexit might turn out to be positive in the mid and long run, forcing British companies to be more productive and resulting in overperformance against US equities. Getting exposure to Europe via the Vanguard FTSE Europe ETF The Vanguard FTSE Europe ETF tracks the FTSE Developed Europe All Cap index, providing broad exposure to European equities that go beyond the European Union. I see VGK as an efficient vehicle for gaining exposure to European equities. The ETF has a low expense ratio of 0.09%, which I consider competitive for a non-US fund, and its bid/ask spread is just 0.01%, on par with leading US ETFs. Although VGK’s composition does not align exactly with the STOXX Europe 600 Index used as the primary reference in this article, it is very similar and it provides broad equity exposure across the European region.   VGK ETF, Top 10 Countries (Vanguard.com) One of my favorite features of the VGK ETF (and the index it tracks) is its overweight allocation to non-EU countries. For example, the United Kingdom and Switzerland together make up almost 40% of the fund. I see this as a key advantage, as non-EU countries have historically outperformed their EU counterparts in terms of stock market returns over the past few decades—a point I discussed earlier in this article. I do not see the fact that the fund only tracks developed countries as a drawback. The European region has very few developing countries, mostly in the Balkans or Eastern Europe, and these markets represent a negligible share of global stock market capitalization. Russia was the only exception as a large developing market in Europe, but it has become effectively inaccessible to foreign investors since its invasion of Ukraine in 2022. Additionally, my analysis of Europe’s challenges focuses primarily on issues faced by developed countries, making the exclusion of developing markets from the fund less relevant to the broader investment thesis. While I like the VGK ETF as a way to get efficient exposure to European equities, my recommendation for this fund is ultimately a HOLD. This is in line with the thesis I just presented, and the fact that I do not see European equities overperforming US peers in the foreseeable future. If you already hold VGK in your portfolio, I see no compelling reason to sell and potentially trigger a taxable event. It may be worthwhile to keep the fund for diversification purposes or as a potential bet that Europe could eventually address its structural issues, leading to equity outperformance—an outcome I discussed in the risk section of this article. However, I personally recommend that investors considering entering European equities proceed with caution and avoid investing in the region for now. Should there be significant political developments that address Europe's structural issues, I would be open to reconsidering this stance. Conclusion Investing in Europe today means investing in a region facing deep-rooted structural issues in productivity, innovation, and demographics, which have become increasingly apparent over the last 20 years. These challenges have led European equities into their 15th consecutive year of underperformance compared to U.S. stocks. I believe much of Europe’s issues stems from poor policymaking, including an obsession over regulation and the failure to complete the European Union with a fiscal union, a common market for services, and a shared banking system. Given the inherent unpredictability of political risk, I recommend avoiding broad exposure to European equities for the foreseeable future.  I believe the only effective way to invest in Europe may be to focus on specific countries which could outperform the broader area, or carefully cherry pick individual stocks. Both strategies, which deserve their own in-depth analysis, carry unique risks that differ from investing broadly in a pan-European index like the STOXX Europe 600 Index.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2470026675"}