Hidden Opportunities in European Markets: Why Look Beyond the S&P 500?

European markets are at a turning point. While specialized analysts anticipate a significant rebound in the coming quarters, investors face a critical question: is it worth diverting capital to Europe when U.S. stocks are hitting all-time highs? The answer might surprise those who only follow the North American universe.

The macroeconomic scenario: inflation decreasing, rates high for now

The trajectory of the main European economies reveals a landscape of contrasts. The European Central Bank (ECB) and the Bank of England (BOE) kept their reference rates unchanged in January 2024, setting them at 4.50% and 5.25% respectively. Although expectations of early cuts have diminished, the fight against inflation is gaining ground.

The numbers do not lie: inflation in the eurozone fell to 2.8% in January 2024, compared to 9.2% a year ago. In the UK, the decline was equally dramatic: from 10.5% to 4.0%. Monetary authorities assure they will maintain pressure until converging toward the 2% target, probably during 2025.

However, structural economic weakness is concerning. Germany, the engine of the European Union and the third-largest economy worldwide, fell into technical recession. The eurozone grew just 0.1% in the last quarter of 2023, while the UK shows mixed signs of recovery. Added to this is geopolitical vulnerability: the invasion of Ukraine affects energy costs, and conflicts in the Middle East distort global maritime trade.

Despite this adverse context, European markets for investing show signals contrary to weak fundamentals. Two of the region’s main stock indices have accumulated double-digit returns since late October.

European stock exchanges: where is the action

European markets offer multiple entry points, each with its own characteristics:

Germany hosts 7 stock exchanges, with the Frankfurt Stock Exchange being the flagship. Over 480 domestic companies are listed there, including giants like Adidas, Bayer, Deutsche Bank, and Mercedes-Benz.

United Kingdom concentrates financial power in the London Stock Exchange, where over 1,900 companies trade daily. BP, Shell, Rio Tinto, AstraZeneca, and Unilever exemplify the sector diversity available.

Pan-European markets expand the horizon: Euronext connects 7 nations simultaneously (France, Italy, Netherlands, Belgium, Ireland, Norway, Portugal) and hosts 1,300 companies, 40,000 bonds, and 5,100 investment funds. Nasdaq Nordic groups 7 Nordic and Baltic economies with over 800 listed companies.

Spain participates through the Madrid Stock Exchange with 1,340 listed companies, reflecting IBEX 35 companies like Santander, BBVA, Inditex, and Iberdrola.

Switzerland, with a high-quality capital market on SIX Swiss Exchange, hosts over 250 global companies such as Nestlé, Roche, and Novartis.

By market capitalization as of 2023, Euronext leads with $6.65 trillion, followed by London (3.18 trillion), Germany (2.16 trillion), Switzerland (1.96 trillion), Nasdaq Nordic (1.91 trillion), and Spain (0.74 trillion).

Indices: thermometer of appetite for European markets

Euro Stoxx 50 represents 50 large corporations of the eurozone. It is currently trading at €4,654.55 with a 15.9% increase since October 2023 (gain of 638 points). The upward trend remains in place despite short-term corrections. Companies like SAP, Siemens, Sanofi, Airbus, and BNP Paribas support this index.

Stoxx Europe 600 covers 600 companies of various sizes across 17 European countries, including the UK. Trading at €483.93, it has gained 12.7% since October. Although maintaining an upward trend, it has started to correct. Giants like HSBC, Diageo, Hermès, Stellantis, and Pernod Ricard are part of this basket.

FTSE 100 reflects the 100 largest corporations in London, representing 80% of the UK’s market capitalization. After experiencing a downward trend between February and October 2023, it recovered 6.5% until January, then retreated 3.7%, stabilizing at £7,615.54. Barclays, Flutter Entertainment, Glencore, and Rolls-Royce are among its constituents.

Other relevant indices include DAX 40 (Germany), CAC 40 (France), and IBEX 35 (Spain).

Instruments for access: CFDs and futures

Contracts For Difference (CFD) allow exposure to indices without acquiring underlying assets. They offer bullish and bearish speculation with flexible leverage. They operate decentralized through brokers, with no commissions per trade but spreads over the price. The risk is proportional to the leverage used.

Futures represent obligations to buy/sell at a predetermined date and price. They are traded on regulated centralized markets, with commissions set by the exchange. Although more regulatorily secure, they require higher initial capital.

The key in both instruments lies in disciplined money management: limiting losses per trade to 1-3% of capital and sizing positions conservatively.

Five compelling reasons to consider European markets

Depressed valuations vs. global competition

European stocks trade at a substantial discount compared to their U.S. peers. The P/E ratio of the European market averages just 15.00, indicating relative pessimism. However, this creates potential for appreciation if economic conditions improve or investors rediscover intrinsic value. Cheap stocks today could be winners tomorrow if the narrative changes.

Technology and innovation as growth vectors

Renewable energies, electric vehicles, biotechnology, and digital transformation concentrate leading European companies. These sectors project higher growth than the overall economy, providing exposure to megatrends like energy transition and global decarbonization.

Effective portfolio diversification

Portfolios anchored in U.S. or Asian markets benefit from incorporating European assets. Europe maintains its own economic cycle, independent monetary policy, and different political dynamics. Non-correlated assets reduce systematic risk while opening new sources of return.

Robust corporate fundamentals

European companies exhibit financial strength: respectable cash flows, durable competitive advantages, and resilience amid high rate pressures and weak demand. Recent data indicate that the return on equity (ROE) of European firms has improved since mid-2021, contrary to U.S. and emerging markets performance. Net Debt/EBITDA levels are about 20% below the global average. Additionally, share buybacks are operating at twice the historical average, suggesting managerial confidence in current valuations.

Democratized access to investment

Availability of ETFs and CFDs facilitates entry into European markets without operational barriers. Regulations favor these structures in Europe, unlike the U.S. where CFDs are prohibited. Low costs, higher liquidity, and flexibility characterize these vehicles.

Final perspective: times to decide

The European economic cycle is still developing. Corporate profit margins typically behave pro-cyclically: they rise with growth and fall during contraction. The central question is whether rate cut stimuli (expected in 2025) combined with current depressed valuations will generate divergence from U.S. markets.

Certainly, European stocks represent a valid alternative in a context where the S&P 500 and NASDAQ 100 reach all-time highs. Prudence suggests monitoring economic behavior in upcoming quarters to assess the impact on corporate earnings and, consequently, on European market prices.