Why Are European Stock Markets Severely Undervalued? The Five Key Truths Investors Must Know

Your Perception of the European Stock Market Might Be Wrong

Many believe that the European stock market lacks tech giants and growth opportunities, making it not worth investing in. But this judgment is too superficial.

When we talk about “bolsa de Europa,” we’re not referring to a single exchange, but a complex network of stock markets across European countries—exchanges in London, Frankfurt, Paris, Madrid, Amsterdam, and more. This system covers key economies like the Eurozone, the UK, and Switzerland, influenced by factors such as economic growth, central bank policies, and geopolitical issues.

What is the real situation of the European stock market? Let’s let the data speak.

The European Stock Market Is Undergoing a Structural Shift

Since the 2008-2009 financial crisis, the industry composition of European stocks has changed dramatically. How significant is this shift?

Industrial companies’ share increased from 11.3% to 15%; healthcare from 9.7% to 16.1%; technology and information from 2.9% to 6.7%.

Meanwhile, traditional strong sectors have shrunk: finance dropped from 21.1% to 17.5%, energy from 10.9% to 6%, and communication services from 6.5% to 3.1%.

What does this mean? The European stock market is shedding reliance on traditional industries, with increasing weights in high-growth sectors like technology and healthcare. This process is slow but steady—who says Europe has no tech opportunities?

Europe Is More Balanced and Less Risky Than the US

Compare it with the US stock market, and the difference becomes clear: US tech stocks account for nearly 30%, while Europe only 6.7%. How important is this difference?

Any crisis in a single industry would have a bigger impact in the US, whereas Europe’s diversified industry allocation makes it more resilient.

This is good news for index investors. By investing in major European indices, you get a more diversified basket, reducing the risk that a collapse of a single tech giant drags down your entire portfolio.

The True Revenue Sources of European Companies Are Global

This is a key point many overlook: In 2023, 58% of European listed companies’ revenue came from outside Europe.

Compared to 2012, when domestic European revenue accounted for 61%, it has now fallen to 42%. What does this indicate? European companies are now truly global players.

North American markets contribute 26% of revenue, emerging markets (including Latin America and Africa) contribute 25%. In other words, the European stock market offers exposure to the global economy, not just Europe’s. ASML, a Dutch chip equipment manufacturer, is a typical example—market cap of €21.59 billion, with major clients in Japan, South Korea, and Taiwan, playing a strategic role in the US-China chip war.

Current Status of Europe’s Top Five Indices

The most direct way to invest in European stocks is through mainstream indices. Let’s look at their performance:

DAX 40 (Germany): A barometer of the 40 largest liquid companies, including Siemens, Volkswagen, Mercedes-Benz, Deutsche Bank. Reflects the health of Europe’s largest economy.

FTSE 100 (UK): The 100 largest companies listed on the London Stock Exchange, accounting for 80% of LSE’s market cap. Includes AstraZeneca, Unilever, Vodafone. Highly liquid but affected by the UK’s economic slowdown.

Euro Stoxx 50: Represents the 50 leading companies in the Eurozone, covering 11 countries and multiple sectors—from Airbus, LVMH, TotalEnergies to ASML, Santander. The best window into Europe’s overall health.

IBEX 35 (Spain): Spain’s 35 major listed companies, including BBVA, Inditex, Iberdrola. Performed best in 2023 with a 9.72% increase, nearly matching the S&P 500.

CAC 40 (France): France’s top 40 companies, including L’Oréal, Renault, Alstom. Represents France’s economic vitality.

Why Is Now a Good Time to Invest in Europe?

Looking at valuation data, P/E ratios in 7 major sectors are below their 10-year averages. These sectors include communications, consumer discretionary, consumer staples, energy, financials, materials, and utilities.

What does low valuation mean? Stocks are relatively cheap. If the economy achieves a soft landing and interest rates start to decline, these undervalued stocks have significant upside.

But we must also consider risks. Factors like the Ukraine war, Middle East conflicts, and geopolitical tensions are impacting markets. Since late July, major European indices have been declining, and in October, tensions in the Middle East caused further drops.

Outlook for the European Stock Market in 2024

Europe’s economy is slowing but remains resilient. Inflation has retreated, though not enough for central banks to start cutting rates. Market expectations are that rate cuts will begin in Q2 or Q3 2024. Once that happens, high-quality, undervalued stocks could rebound.

The key question is: Will Europe’s valuation discount narrow relative to the global market (especially the US)?

Historically, such discounts don’t last forever. Markets will adjust, and capital will reallocate. The current undervaluation and overlooked status present opportunities for patient, discerning investors.

Don’t be shackled by outdated perceptions. Europe’s stock market isn’t a tech desert; it’s a redefined frontier of investment. If you haven’t yet gained exposure to Europe, now is the time to seriously consider it.