How is the European stock market changing as it is exposed to the Chinese crisis and the winds of the trade war? An expert analysis of how to invest in stocks in Europe.
What’s happening in the European stock market and what should investors expect?
Experts say European stock gains are losing steam and could weaken in the absence of engines strong enough to power the benchmark Stoxx 600 giants in particular.
Investors have pulled billions of dollars out of Europe-focused funds and ETFs, in stark contrast to the large sums pumped into US and international equity funds. A key issue is that the region’s main drivers of gains have fallen.
“The leadership is changing in the European market,” said Ariane Hayate, a fund manager at Edmond de Rothschild Asset Management. “Smaller, defensive sectors are leading the pack,” she said.
It is no coincidence that the luxury sector led by LVMH has collapsed over the past six months along with the auto companies, while in more recent months, healthcare heavyweights such as Novo Nordisk A/S and technology leaders including ASML Holding NV have slipped from their peaks. And with no obvious candidates to take over from these giants, the region’s stock performance has remained exposed.
The ongoing changes in the global trade and geopolitical environment are therefore impacting European big companies, and their shares, much more than the US giants. Investors need to rethink their investment strategy in Europe, according to experts.
What’s happening to the European stock market? Factors to Watch As noted in a Bloomberg financial analysis, the European market is by definition more cyclical than its US counterpart with those economically sensitive sectors representing about two-thirds of the Stoxx 600 benchmark.
This assessment helps to understand why there are some factors to consider for investing now in companies listed in Europe. Barclays Plc strategist Ajay Rajadhyaksha warned: “If the risks of a global trade war increase, it is very easy to see these names [giants listed in Europe] downgraded a bit due to trade concerns”.
The old continent is more oriented to Chinese demand than the US. According to Goldman Sachs strategists, companies derive about 8% of their revenues from the Asian country, compared to just 2% of their peers in the S&P 500 index. The slowdown in the dragon’s growth and trade risks with China are therefore impacting factors for European stocks.
While some argue that the risk of trade wars could be amplified under a Donald Trump administration, Europe is already planning further tariffs on Chinese-made electric vehicles to cope with strong competition. A conflict between the powers could escalate and damage the trade prospects of the Stoxx 600 benchmark giants.
Another side effect of China’s economic woes is that oil prices at record lows have been clouding the outlook for European energy heavyweights such as BP Plc, Shell Plc, and TotalEnergies SE. London mining stocks are also suffering from falling iron ore and copper prices (also linked to lower Chinese demand due to its weak economy).
Furthermore, four of the ten biggest contributors to the Stoxx 600 returns this year in Europe have come from the healthcare sector. Adding consumer staples company Unilever Plc, the five companies’ contribution to its performance rises to more than 30%. This defensive bias is unlikely to provide the same boost to cyclical stocks like luxury goods, according to Bloomberg analysis.
While earnings estimates for 2025 have been generally positive so far, Barclays’ Rajadhyaksha believes data surprises could hurt more than help. Earnings estimates could actually be a risk for the region. A Citigroup Inc. gauge of earnings revisions that factor in upgrades and downgrades has been negative for much of the summer.
How to Invest in European Stocks?
With former European market darlings losing steam, investors are rotating to find new opportunities.
For Gilles Guibout, a Paris-based portfolio manager at Axa Investment Managers, some parts of the stock market look promising if the economy tests a soft landing. “Dividend increases could help boost valuations, and who pays the dividends? banks and utilities,” he said.
European banks have had a stellar year so far, up 18%, and there is room for further gains given low valuations, according to the strategist. Investor interest in the sector has also grown since UniCredit SpA CEO Andrea Orcel said he was considering a full takeover of Germany’s Commerzbank AG.
“For utilities, lower interest rates provide immediate relief, and they have already started to outperform this summer. There are prospects of rising dividends, rising earnings, and multiple expansion in this space,” Guibout added.
Looking ahead, other fund managers believe there are segments of the stock market poised to take over the market leadership if a recession is averted.
“If we are indeed entering a soft landing, then it makes sense to bet on the rally broadening, on laggards, such as small and mid-caps,” suggested Amelie Derambure, senior multi-asset portfolio manager at Amundi in Paris.
Investors will therefore be watching closely the macroeconomic indicators on the old continent and international dynamics, aware of Europe’s exposure to global political and economic phenomena.
|DISCLAIMER
The information and considerations contained in this article should not be used as the sole or main basis for making investment decisions. The reader retains full freedom in his or her investment choices and full responsibility in making them, since only he or she knows his or her risk appetite and time horizon. The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public to save.|
Original article published on Money.it Italy 2024-09-14 13:34:00. Original title: Il mercato azionario europeo sta cambiando, come investire?
