European Markets: An Underappreciated Investment Opportunity
As we dive into 2023, the market landscape is shifting, and it’s critical that we pay attention. For the first time in years, European equities are catching up with U.S. stocks, prompting savvy investors to reevaluate their portfolios. If you’ve been primarily focused on American stocks, now may be the time to consider adding European equities. The reasons for this are compelling, and it’s time for American investors to consider this undervalued market.
The Rise of European Equities
Interestingly, Europe is emerging as the best-performing equity region globally this year. Analysts are beginning to suggest that despite the skepticism around European stocks, this year could signal a pivotal inflection point. For example, the Vanguard FTSE Europe ETF (VGK) has gained 7.0% through February 5, far outpacing the 3.1% return of the SPDR S&P 500 ETF (SPY). This marks a significant turnaround, making European stocks worthy of consideration for any investment portfolio.
Valuation Matters
One of the primary reasons European equities are gaining traction is their relative valuations. Vincent Deluard, the director of global macro strategy at StoneX, points out that the cyclically-adjusted price/earnings (CAPE) ratios tell a critical story. The CAPE ratio for the U.S. is nearly 50% higher than the world average, indicating that American stocks are significantly overvalued. Conversely, European equities trade at approximately a 20% discount to the average, and about half of the U.S. CAPE ratio. This presents a compelling case for investing in European stocks at a time when they might be undervalued compared to their American counterparts.
The Impact of Sentiment and Trump’s Re-election
Market dynamics often hinge on sentiment, and Deluard emphasizes that significant reversals typically occur when sentiment is at its lowest. The focus is on the impending re-election of President Trump, which Deluard believes could signify ‘peak U.S’ and the end of a cycle of American exceptionalism. Should this theory hold water, a pivot toward European equities may be exactly what investors need to capitalize on.
The Health of the European Banking System
Another factor in favor of European stocks is the improving health of the European banking system. Historically, the frailty of European banks has hampered stock market growth across the region. However, as Deluard notes, European banks have strengthened their capital ratios, experienced growth in bank credit, and even seen major mergers such as Credit Suisse’s consolidation. The increased stability of the banking sector is a positive indicator for potential investors.
How to Invest in European Markets
If you are eager to tap into this opportunity, the most efficient way is through mutual funds or exchange-traded funds (ETFs) that track European markets. The Vanguard FTSE Europe ETF, with approximately $17.6 billion in assets and a mere 0.06% expense ratio, stands out as the most robust option in this category. This ETF offers investors a diversified approach to European equities without hefty management fees.
Stock Picks Worth Considering
If you prefer to handpick individual European stocks, there are several noteworthy options that U.S. investors are already familiar with. Companies such as Allianz (ALIZY), BP (BP), Medtronic (MDT), Novartis (NVS), and Volkswagen (VWAGY) are already receiving recommendations from various investment newsletters. Each offers unique potential for growth within the European market landscape.
Conclusion: A Strategic Pivot Towards Europe
In conclusion, for those conservative investors who value traditional financial principles and are open to the prospect of diversifying their portfolios, European equities deserve your attention. The combination of relative valuations, improved banking conditions, and shifting market sentiment suggests that now is not just a good time, but perhaps the ideal time to look toward Europe. Don’t be the last to catch on to what could very well be a financial gold mine.
