Invest smartly in European stocks: A practical guide for 2024

Why European Stock Markets Deserve Your Attention Now

There is a widespread belief that European financial markets do not offer competitive opportunities compared to Wall Street. Nothing could be further from the truth. Although Europe has not produced tech giants like Apple or Google, the stock market landscape has undergone a radical transformation in the last 15 years. European stock exchanges are diversified, attractively valued, and provide exposure to profitable businesses worldwide.

Companies like ASML (listed in Amsterdam), valued at €215.9 billion, exemplify this potential. ASML develops advanced lithography systems for semiconductor manufacturers and operates in the most strategic markets worldwide, from Asia to North America.

Major Indices: Your Gateway to European Markets

Investing directly in dozens of European companies is impractical. Stock indices solve this problem. They measure the overall weighted performance by market capitalization, allowing investors to access multiple companies through a single underlying asset (ETF, futures, options).

DAX 40: The German locomotive

The DAX 40 represents the 40 largest and most liquid firms listed in Frankfurt, reflecting the health of Germany’s economy, the strongest in Europe. It includes Siemens, Volkswagen, Adidas, and Mercedes Benz. This index is closely followed by global investors as a thermometer of the continent.

FTSE 100: The UK gauge

The FTSE 100 groups the 100 largest-cap companies on the London Stock Exchange, representing approximately 80% of the total market value. Companies like AstraZeneca, BP, and Unilever are part of it. Its liquidity and transparency make it attractive, although it faces challenges from currency fluctuations and geopolitical risks.

Euro Stoxx 50: Eurozone diversification

This top-tier index monitors 50 leading companies across 11 eurozone countries, covering banking, energy, technology, and consumer goods. Airbus, LVMH, TotalEnergies, and ASML are key components. It serves as a benchmark for the region’s economy.

IBEX 35: The Spanish indicator

The IBEX 35 tracks the 35 most liquid companies in the Spanish market, including BBVA, Inditex, and Repsol. It uses market cap weighting and is reviewed semiannually. It reflects Spain’s international exposure and economic strength.

CAC 40: The French benchmark

The CAC 40 index comprises the 40 most important stocks within the top 100 market caps on Euronext Paris. Firms like BNP Paribas, L’Oreal, and Renault are included. It is used as an underlying for structured products and investment funds.

Structural Change in European Markets

Between 2010 and 2023, the sector composition of European stock exchanges experienced a notable reconfiguration. Sectors that gained participation include: Industrials (11.3% to 15.0%), Healthcare (9.7% to 16.1%), Consumer Discretionary (8.9% to 11.3%), and Information Technology (2.9% to 6.7%).

Meanwhile, traditional sectors ceded ground: Financials (21.1% to 17.5%), Materials (11.0% to 6.9%), Energy (10.9% to 6.0%), and Communications (6.5% to 3.1%).

This shift demonstrates how European stock markets are modernizing, although at a more gradual pace than other markets.

Competitive Advantage: Less Concentration than the US

Unlike Wall Street, where the technology sector accounts for nearly 30% of the index, in Europe it reaches only 6.7%. This broader sectoral distribution provides greater stability: any crisis in a specific branch impacts the European economy less severely than the US.

For those investing via indices, this means more predictable volatility and more balanced returns over the long term.

Income Globalization: The True Driver

A crucial fact: between 2012 and 2023, the proportion of income generated by European companies within their borders decreased from 61% to just 42%. The remaining (58%) comes from abroad: 26% from North America and 25% from Emerging Markets (Latin America, Africa, Asia).

This structure exposes European investors to global growth opportunities, not limited to the region.

Attractive Valuations Today

According to valuation analysis P/E (Price/Earnings) as of September 2023, 7 of the top 10 sectors in European markets traded below their 10-year average. This included communication services, consumer discretionary, energy, financials, materials, and utilities.

This depreciation reflects the temporary slowdown of the European economy. As the region completes its interest rate hike cycle and achieves a “soft landing,” these valuations could expand significantly.

Macroeconomic Context: Factors to Watch

Declining but Persistent Inflation: Elevated interest rates have reduced inflation, though it remains high in several countries. Central banks are expected to keep restrictive rates until mid-2024, pressuring growth companies but benefiting the financial sector.

Moderate Activity Weakness: Manufacturing and services PMI indices remain below 50, indicating contraction. However, this could be temporary.

Resilient Labor Market: The eurozone unemployment rate hit historic lows of 6.4%, and annual wage growth (4.6%) exceeds inflation, supporting consumer spending.

Index Performance: Recent Results

By the end of 2023, returns were mixed:

• IBEX 35: +9.72% (best performer in Europe, on par with S&P 500)
• DAX 40: +6.82%
• Euro Stoxx 50: +6.45%
• CAC 40: +5.29%
• FTSE 100: -1.27% (pressured by weak UK economy)

Since July 2023, indices have traded in negative territory, intensified by geopolitical conflicts in the Middle East that pressure oil markets.

Is Investing in European Stocks Worth It Now?

European markets present a unique set of features: valuations below historical levels across multiple sectors, broader diversification than the US, exposure to global income, and solid labor markets supporting domestic demand.

Geopolitical risks exist (Ukraine, Middle East), but so far they have not led to systemic economic crises. As interest rates are expected to decline in 2024 (base scenario from Q2), these compressed valuations could normalize.

For investors willing to accept moderate volatility in exchange for international diversification, European stocks offer genuine opportunities. The valuation discount that has historically penalized the region could finally close.