It is very difficult to find an investment opportunity in shares right now, and the search becomes much more difficult if we look for them in the old continent. The general sentiment points to a massive sell-off against companies, bonds and the European currency, along with the increasing energy crisis. But you have to think differently and better than others to get better results. So here today we bring you three reasons why investing in European stocks can still have hope...
1: Europe has many valuable companies
Investing in European stocks does not necessarily have to be based on its economy. The old continent generates more than half of its income from outside its borders, with a wide range of high-value companies worldwide. Luxury, alcoholic beverage and automobile companies, with brands such as LVMH, Chanel, Hermès, Gucci, Rolex, Cartier, Porsche o Ferrari They are based in Europe and the recent decline in markets could present an opportunity to make an investment in stocks in this luxury sector.
It should be noted that the luxury sector is not recession resistant, but its exposure is mainly to the very rich. This fact positions it well against inflation and energy crisis, given that these brands can raise prices without a material impact on their customer demand. Furthermore, since many of these companies continue to rely on the deep liquidity of their founding families, they tend to take a long-term view and look beyond any current setbacks.
2. Europe has some of the leading companies in the renewable energy sector
Even though we are mired in skyrocketing inflation and fears of a recession caused by the energy crisis, are also focused on alleviating the effects of climate change. In any case, high gas prices and the need to not be dependent on other regions are accelerating Europe's transition towards renewable energy, as demonstrated by its plan REPowerEU.
Europe is a leader in green technologies and offers better investment opportunities than any other market. It is home to major wind turbine manufacturers, such as Vestas, Siemens Gamesa y Nordex, as well as leaders in the production of green energy, such as Iberdrola, EDP, Enel y orsted. More than a one-off stimulus measure, many of the measures proposed by the European Green Deal will continue to drive growth for many years to come for companies exposed to the issue.
3. Investing in European stocks has long-term incentives to reduce costs
European stocks operating in the same sectors as US stocks have historically traded at a lower P/E. This is because European stocks have more costs than American stocks, mainly due to interest rates, personnel costs and taxes. We could see a series of cost cuts and changes in fiscal policy that will benefit the economy when energy prices normalize. But European companies face a different problem. The weakening of the euro has increased the interest of American companies in acquiring European companies. The strength of the dollar and the abundance of cash on balance sheets increases the likelihood of acquisitions.
And companies that operate in sectors that operate with a higher cost structure than their peers, that have a unique brand value or that operate in different geographic areas than their competitors, tend to be among the most interesting targets. . For stock investing, this is great news because buyers often pay a premium over the price of companies.
Where is investment in European stocks headed then?
If we look at the data from the old continent, the Stoxx 600 (yellow line) is down 21% this year and the euro (blue line) is down another 17% against the dollar. Europe may not be having its best time, but it is probably better than many think. At first glance we could go long in the US economy and short in the European economy, but we could lose a golden opportunity in the long term. The gap between the S&P 500 and the Stoxx 600 is larger than ever, which may offer us a good entry point for our European equity investment portfolio.
Right now, it looks like the bottom point for the European economy will likely come this winter, but beyond that, the risks will likely tilt in its favor. A season of warmer than expected temperatures, improved access to energy supplies, progress in supply chains and any easing of the conflict between Russia and Ukraine are unexpected positives that could favor investing in European stocks.
Any ETFs to follow?
Given Europe's advantage in renewable energy, we can predict a possible rebound in the renewable energy sector on the old continent. Although there are many ETFs related to the energy transition, many of them include large companies that base their businesses in different sectors. Therefore, in addition to investing directly in companies exposed to these trends, we could invest in the Invesco MSCI Europe ESG Climate Paris Aligned UCITS ETF (PAUE) or in the Amundi MSCI Europe Climate Transition CTB UCITS ETF (LWCE) to gain exposure to European companies that contribute to the energy transition.