Peak U.S.? Why Now May Be a Good Time to Add European Equities to Your Stock Portfolio

The signs are pointing toward a significant shift in the global equities landscape, and conservative investors should take heed: European stocks are showing promising performance and may warrant serious consideration in your portfolio. In a year filled with uncertainty, particularly with President Trump’s ongoing trade threats, the notion of investing in European equities may seem counterintuitive. However, the data suggests otherwise.

European Equities Leading the Charge

As of February 5, 2023, Europe claimed the title of the best-performing equity region globally, with the Vanguard FTSE Europe ETF (VGK) recording a year-to-date gain of 7%. In stark contrast, the S&P 500 ETF (SPY) managed only a 3.1% return. This marked contrast in performance raises the question: is it time to diversify out of U.S. equities and into European markets?

Valuation Matters

A key point made by Vincent Deluard, director of global macro strategy at investment firm StoneX, is that relative valuations favor European equities. The cyclically-adjusted price-to-earnings (CAPE) ratios illustrate this point clearly. Currently, the U.S. ratio stands nearly 50% higher than the world equity market average, while European stocks trade at a 20% discount. This significant divergence indicates that European equities could offer a valuable opportunity for savvy investing.

Contrarian Investing: A Valuable Strategy

The term “career-ending trade” might resonate deeply with brokers and financial advisors, denoting the complexity and risk associated with recommending European equities. Still, as Deluard asserts, “reversals of long-term trends” often emerge when sentiment is at an all-time low—the classic contrarian playbook. When sellers run out of shares and bad news fails to impact prices, what follows is often a reallocation of capital that can drive prices higher. Here, we may very well be at that tipping point.

A Changing Economic Landscape

Further fortifying the bullish sentiment is the state of the European banking sector. Once regarded as the Achilles’ heel of European equity performance, the banking system has turned the corner. Deluard emphasizes that capital ratios within European banks have improved, bank credit is on the rise, and strategic mergers—like the one with Credit Suisse—have created a healthier financial environment. Given that European banks have returned substantial capital to shareholders, they stand as a compelling case for investment.

What Do Experts Say?

Even influential voices in global finance, like Larry Fink, chief executive of BlackRock, share this optimism. His recent comments at the World Economic Forum in Davos indicated a prevailing sense that the pessimism surrounding Europe is unwarranted and presents an opportunity for investment. Fink pointed out that the tide is turning in favor of European markets, and the time for U.S. investors to reconsider their allocations is now.

How to Invest

For U.S.-based investors eager to tap into European equities yet unsure about individual stock selections, the simplest route may be through ETFs or mutual funds focused on the European region. The Vanguard FTSE Europe ETF, leading with $17.6 billion in assets and an expense ratio of just 0.06%, offers a diversified choice for investors keen on establishing a foothold in European markets.

Individual Stock Opportunities

If you prefer the precision of individual stock investments, several European companies with U.S.-listed shares have received positive recommendations from leading investment newsletters. Familiar names that might pique your interest include:

• Allianz (ALIZY)
• BP (BP)
• Medtronic (MDT)
• Novartis (NVS)
• Volkswagen (VWAGY)

Conclusion

While the prevailing sentiment might cling to the strength of U.S. stocks, the emerging data and analysis indicate that it may be time to diversify into European equities. This may not only protect against market volatility, but also capitalize on the potentially forthcoming shift in performance. With European markets poised for a turnaround, savvy investors shouldn’t overlook this promising opportunity.