American peak? Why adding European stocks to your stock portfolio can be a good idea right now
So far this year, the best-performing equities region in the world is Europe.
Despite President Trump’s threat of putting tariffs on the region, some courageous contrarians believe that it is time to acquire European stocks.
I say “gutsy” because analysts who had forecast that European stocks would beat U.S. stocks up until this year were repeatedly mistaken. As a result, earlier this week, Vincent Deluard, director of global macro strategy at investment firm StoneX, referred to European stocks he recommended to his customers as “career-ending trades.”
However, as the following chart indicates, the tide may be turning based on performance since the start of the year. Europe is actually the region with the best equity performance so far this year. For instance, according to financial analyst Morningstar, the Vanguard FTSE Europe ETF VGK had a 7.0% year-to-date gain as of February 5—more than double the SPDR S&P 500 ETF SPY’s 3.1% return.
One of the reasons Deluard thinks European stocks should have a significant share of globally diversified equity portfolios is because of their relative values. The chart below, which depicts the cyclically-adjusted price/earnings ratios (CAPE) for several of the biggest stock markets globally, serves as an example of this. With a CAPE ratio that is about 50% more than the global equity-market average, the U.S. ratio stands out as the anomaly. Comparatively speaking, Europe trades at a 20% discount to that average and just about half the U.S. ratio.
Although the U.S. stock market has been performing significantly better, Europe’s CAPE ratio has been significantly lower than the U.S. ratio for a number of years. However, as Deluard notes, “when sentiment is so depressed that bad news no longer affects prices,… sellers run out of shares to dump, and the small bets of contrarian investors start to move prices,” it is common for long-term trends to reverse.
The reelection of Trump “marks ‘peak U.S.’ and the end of a cycle of American exceptionalism.”
“Europe’s world-leading year-to-date performance may indicate that we’re at that point today,” Deluard added. The CEO of BlackRock, the biggest asset management company in the world, Larry Fink, concurs. He was cited last month as saying, “Europe is too pessimistic,” during the World Economic Forum in Davos, Switzerland. I think it’s probably time to start making investments in Europe again.
The reelection of Trump, Deluard continued, “marks ‘peak U.S.’ and the end of a cycle of American exceptionalism.”
The improved health of the European banking system is another positive indicator for European stocks. One of the main causes of European stocks’ recent underperformance was the illness of European banks. However, Deluard said that “credit Suisse has been merged, bank credit is expanding, and capital ratios have been raised in European banks.” He went on to say that “European banks return so much capital to shareholders… they have performed as well as the Magnificent Seven stocks in the past two years.” This is a little-known fact in this regard. Until they see the statistics for themselves, the majority of American investors don’t think this is true.
Using a mutual fund or exchange-traded fund that is indexed to the stock market in that region is the simplest approach to invest in a diverse basket of European stocks. With $17.6 billion in assets under management and an expense ratio of 0.06%, the Vanguard FTSE Europe ETF is the U.S.-based ETF benchmarked to Europe with the largest assets.
A list of U.S.-listed shares of European-headquartered corporations that are now suggested for acquisition by any of the investing newsletters that my performance auditing firm keeps track of is provided below if you are interested in specific European companies. Allianz (ALIZY), BP (BP), Medtronic (MDT), Novartis (NVS), and Volkswagen (VWAGY) are names that American investors are familiar with.
