The US and European stock markets have delivered significant gains recently. Photo / AP
OPINION
In recent years, there have been numerous recommendations to consider Europe over the United States when investing in stocks. The argument is that Europe’s stock market will outperform the US in
the future due to the significantly lower valuation of European shares compared to those in the US.
This comes at a time when America’s S&P 500 has provided a 158% return over the past decade (as of December 31, 2023), while the MSCI Europe stock index has only returned 43%.
Although European stock markets are cheaper compared to the US, investors should also consider the underlying reasons behind this difference. Understanding the distinctions between the US and European stock markets can provide valuable insights for New Zealand as well.
Examining the Differences
A closer look at European equity markets reveals a heavier emphasis on “old economy” companies like financial institutions, industrial firms, and consumer staple companies. In contrast, the US market is dominated by higher-growth technology companies, which typically experience faster profit growth. This influences investors to pay more for shares in US companies, driving up their valuation compared to European counterparts.
Impact of Regulatory Environment
Europe’s regulatory framework has hindered its competitiveness, stifled innovation, and posed challenges for small and medium-sized enterprises. This regulatory burden, stemming from various sources across individual countries and the broader single market, creates obstacles for economic growth and progress.
The US, in contrast, has fostered an environment conducive to innovation, as evidenced by the growth of Silicon Valley tech firms. While American companies focus on technological advancement, Europe grapples with intricate regulations that may impede its economic development.
Factors Affecting Economic Growth
Ongoing geopolitical events, such as the Ukraine war, have repercussions for Europe’s economic outlook. The region’s reliance on Russian natural gas and the shifting global landscape pose challenges for economic diversification and growth. In contrast, the US offers incentives to businesses to reshore their operations, promoting economic resilience and adaptability.
Furthermore, China’s influence in the global electric vehicle market presents both opportunities and threats for Europe’s economic drivers. As China expands its EV market dominance, European companies struggle to compete, highlighting the importance of innovation and adaptability in a rapidly evolving economic landscape.
Comparing the success of the US and Europe underscores the essential elements for innovation, economic growth, and robust capital markets. For New Zealand, these insights emphasize the significance of economic diversification and supportive policy frameworks to nurture innovation and foster business growth.
– Harry Smith is a Portfolio Manager at Fisher Funds
