Europe may be our nearest neighbour, but that doesn’t mean it gets a lot of love from UK investors. According to research from The Investment Association, retail investors pulled £5.5bn out of European equities in 2022. This marked five straight years of outflows from the continent among these investors.
Some of this reflects the rising cost of living squeezing savings. However, misplaced assumptions about European companies and markets are a key factor in our view. This is shown when European flows are compared to those into North American equities.
So, what does the European stock market look like today?
In short, a market previously renowned for the dominance of defensive industries like telecoms operators and cyclical industries like automotive manufacturers now contains some of the world’s innovative leaders.
This is most clearly represented by the sectors that have gained and lost market share since the financial crisis:
Largest changes in market share by sector, 2008-2024
| Sector | % change | % of market in 2024 |
| Healthcare | +7 | 16 |
| Industrials | +5 | 17 |
| Banks | -7 | 8 |
| Telecomms | -5 | 2 |
Source: Bloomberg, as at 12/08/2024. Past performance does not predict future returns.
In healthcare, years of focused innovation, supported both culturally and politically, have paid off. Novo Nordisk is the pioneer of weight loss and diabetes treatments. In turn, it has led a global transformation in how obesity is treated.
The rise in the industrials index weighting is due largely to two thriving subsectors: electrification and civil aerospace. Within electrification, Europe contains some of the world’s leading companies. These include Schneider, Legrand, Prysmian and Siemens.
Civil aerospace has thrived since the pandemic travel shutdown. French company Airbus operates in a plane-building oligopoly. Its chief rival, Boeing, is in the midst of a multi-year reputational decline. The continent also boasts one of the world leaders in engine manufacturing, Safran.
Other areas worthy of an honourable mention include information technology, which has increased from 5% of the index to 9%. Particularly notable is the semiconductor sector, where European companies have established a niche. With companies such as ASML and ASM International, semiconductor companies are now 5% of the index.
Also notable is the consumer discretionary sector, which now makes up 12% of the index, up from 8%. A clear driver of this has been the luxury goods sector, where Europe has unmatched brands in terms of heritage, brand recognition and market share.
Notably, in all of these sectors European businesses are operating – and dominating – in global markets. Investing in Europe is no longer a case of investing in European economies. Instead, with the valuation gap to the US wider than it was in 2008, Europe represents an opportunity to buy innovation at a cheaper price.
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Past performance does not predict future returns.
Cyclical stocks
Companies that sell discretionary consumer items (such as cars), or industries highly sensitive to changes in the economy (eg. mining).
Equity
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Index
A statistical measure of group of basket of securities, or other financial instruments. For example, the S&P 500 Index indicates the performance of the largest 500 US companies’ stocks. Each index has its own calculation method, usually expressed as a change from a base value.
Valuation metrics
Metrics used to gauge a company’s performance, financial health and expectations for future earnings, eg. price to earnings (P/E) ratio and return on equity (ROE).
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