Five reasons to invest in European stocks – JP Morgan

During the past 15 years, MSCI Europe ex-UK has delivered a 5.9% annualized return in US dollars relative to the 9.0% delivered by US equities. But now, according to Gabriela Santos from JP Morgan, there are 5 reasons to reconsider investing in European equities, in addition to valuations.

Key quotes

“During the dark days of late March, hard-hit countries like Italy, Spain and France were seeing a daily growth rate of new COVID-19 cases at 157%, 88% and 52%, respectively (compared to 48% in the US). Now, the daily growth rate of new cases has sharply declined to only 0.1% in these countries (compared to 1% in the US). Together with the enhanced testing capability and contact tracing and isolation procedures, this leaves Europe in a strong position to continue their recovery in a sustainable and confident manner.”

“Since early May, European countries have begun to gradually reopen and activity is rebounding smartly. In the hardest-hit countries, activity is now operating at about 35% below normal – a 55% improvement that compares to the US’ 30% improvement. This will likely result in a larger hit to 2Q GDP in Europe – but also to a larger bounce in 3Q.”

“There has now been a truly fundamental shift in Europe’s approach. The European Commission has proposed a joint €750 billion recovery plan, financed by issuing joint debt backed by the EU budget and distributed based on need, to deal with the pandemic. In practice, this would mean that wealthier countries would pay more into the pot, while poorer countries would receive more out of it. While not yet final, the plan has received Germany’s approval – a first in the European project.”

“One of the reasons that European equities have lagged behind the US is the sector composition of its market. It has a significantly higher representation of cyclical sectors compared to the US: 50% of market capitalization vs. 34% in the US. As the European and global economic recovery continues (and gains steam next year, likely once a vaccine is distributed), it will be exactly the cyclical regions that will outperform.”

“In addition to the more positive domestic European story, European equities are also a way to gain exposure to global themes, with 54% of MSCI Europe ex-UK’s revenues coming from outside of the region. In particular, Europe is home to the largest luxury consumer brands, which are directly tapped into the growth of the emerging market middle class and their growing discretionary spending.”