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Last year, the equity market theme was pretty simple. US markets (once again) led everyone else and the familiar US technology giants (once again) generated most of the gains. This year, there has been a shift. The Eurostoxx 50 index is 7.5% ahead of the US S&P 500 year-to-date and the Chinese Hang Seng index is over 12% ahead. Mercifully, we have exposure to both these in our portfolios. But, as ever, the question is: is this just a bear market rally or will the rest of the world finally start to catch up to the US? If it’s the latter it would be time to up our exposure to non-US equities.
I am not sure I have a good answer yet but both China and Europe were at different stages, utterly unloved by international investors and have seen a meaningful bounce off price lows. One complication here is that they actually compete pretty hard with each other in some markets. For example, just five years ago China was the 6th largest car exporter in the world. Today it is comfortably number one.
Car manufacturing and related industries employ about 7% of the European workforce. And the Europeans are facing not only cheap competition from China but potential auto tariffs from the US. This doesn’t feel like a great long term investment opportunity.
On the plus side for Europe, it has been trading on a large discount to the US even after you adjust for the differing sector mix (Europe has less technology) and Europe’s lower growth expectations. Any peace deal in the Ukraine might help close this gap. As an example, you can see the impact that the war has had on European equity flows:
Resolution in the Ukraine should also help energy prices to continue to fall. One of the worst performing sectors of the year so far is UK renewable energy. My guess is part of their weakness comes from investors looking forward to cheaper European energy. Of course pain for energy providers is gain for most other businesses. This makes energy providers a good hedge (as was proven in 2022). Today their weakness is telling you there may be some more good news on the way for European companies.
Longer term (and full disclosure: this will not affect this years returns in any way) I am fascinated by how the demographic picture is changing. As an example, there are more people in France who were born in 1946 and who are still alive than were born in 2024. The French birth rate peaked around 2008 and has been declining steadily ever since. France is not the only country that faces this challenge but, I think, to avoid longer term structural decline it needs to start working on a solution.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
