A Tech Renaissance in Old Europe?
As the attention of US investors on international affairs continues to focus on China–its economy, markets, government oversight of its companies, and its relations with the United States–it’s a good time to remember that there is a larger world out there and that Europe is a very big part of it.
The European Union accounts for roughly the same share of global GDP as both the United States and China when adjusted for pricing differences across the regions.[i] However, European economic growth typically lags the US. Europe has had a higher GDP than the US in just 12 of the last 54 years.[ii] For the last decade, US stocks have outperformed the main European benchmark, the Euro Stoxx 600, by an average of 8.05% per year (as of quarter end).[iii]
Europe is perceived to be an old economy, dominated by banks, industrials, consumer brands, utility, and energy stocks. There are no mega dominant European-based technology and internet companies like Apple, Microsoft, Amazon, and Alphabet’s Google.
Europe in Transformation
Long standing perceptions are hard to break, but a closer look at what has been happening in the European economy and markets in recent years is telling a different story. The largest sector represented in the top 50 European companies is technology. Banks now rank sixth and utilities seventh. Other growth-oriented sectors like healthcare, household goods, and food and beverages are on the rise. The MSCI Europe Index is 45% healthcare, consumer staples and industrials–three times the weighting of banks, energy, autos, and telecom companies combined.[iv]
US Venture Capital Firms Flocking to Europe
In the past, European founders of successful startups felt it necessary to move to the US. They are now staying local, and US venture firms like Bessemer Venture Partners, Lightspeed Venture Partners, General Catalyst, and Hoxton Ventures have moved key principals to Europe.[v] In the first half of this year, European startups raised 43.8 billion euros–above the 38.5 billion raised in the entire year of 2020.
Examples of companies with large capital raises this year include Swedish buy-now-pay-later firm Klarna ($1.6 billion), German stock trading app Trade Republic ($900 million), and British payments provider Checkout.com ($450 million). French President Macron has expressed an ambition of seeing 10 European tech companies created now that will reach 100 billion euro valuations by 2030. Reform of EU regulations would help get there, but public listings are rising in both the EU and UK nonetheless.[vi]
The Valuation Gap
European stocks trade at a discount to US stocks, with Europe’s Stoxx 600 selling for 16x earnings versus the US S&P 500 at 21x earnings.[vii] That discount has been deserved given the higher profitability rates of US companies.[viii] As hockey great Wayne Gretzky famously said, “Skate to where the puck is going, not where it has been”. Assuming the European economic and market transformation continues, that valuation gap can close, and the return potential for European equities should improve.
The investment program at Team Hewins strategically allocates 40% of its equity holdings to international markets, with Europe accounting for about a third of that, a meaningful exposure that can effectively capture the long-term improvement in business performance already underway.[ix]
It has been another very good year so far for global equities, with the MSCI All Country World Index up 18.39% through November 19. While China has underperformed with the Shanghai Composite up just over 5%, the US and Europe are above 15%.[x] Global diversification is working.
There is plenty to be thankful for this year as the world slowly but surely moves beyond the pandemic and economies normalize and work through supply chain challenges and cost pressures. We keep our approach simple and efficient but also disciplined, diversified, and ever-evolving, shifting over time as new, great innovations and businesses emerge across the globe.
Principal and Chief Investment Officer
[i] Ec.europa.eu. 2021. [online] Available at: <https://ec.europa.eu/eurostat/documents/portlet_file_entry/2995521/2-19052020-BP-EN.pdf/bb14f7f9-fc26-8aa1-60d4-7c2b509dda8e> [Accessed 22 November 2021].
[ii] Statisticstimes.com. 2021. Comparing United States and European Union by Economy – StatisticsTimes.com. [online] Available at: <https://statisticstimes.com/economy/united-states-vs-eu-economy.php> [Accessed 22 November 2021].
[iii] Source: Morningstar Direct, data as of 9/30/2021.
[iv] Morgan Stanley. 2021. 7 Reasons European Equities are Due a Fresh Look | Morgan Stanley. [online] Available at: <https://www.morganstanley.com/ideas/european-equities-opportunities-2020> [Accessed 22 November 2021].
[v] Shead, S., 2021. [online] Available at: <https://www.cnbc.com/2021/10/22/general-catalyst-bessemer-lightspeed-expand-start-up-hunt-to-europe.html> [Accessed 22 November 2021].
[vi] Browne, R., 2021. [online] Available at: <https://www.cnbc.com/2021/06/18/european-start-up-investment-smashes-2020-record-in-first-six-months.html> [Accessed 22 November 2021].
[vii] Msika, M., 2021. Bloomberg – Are you a robot?. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2021-11-11/goldman-sachs-says-european-stock-market-rally-is-far-from-over> [Accessed 22 November 2021].
[viii] Maerki-baumann.ch. 2021. US and Europe – significant differences persist. [online] Available at: <https://www.maerki-baumann.ch/en/our-investment-expertise/market-comment/US-and-europe-significant-differences-persist> [Accessed 22 November 2021].
[ix] Source: Morningstar Direct.
[x] Source: Morningstar Direct. Data as of 11/19/21.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.