28th December 2015
Chelsea Financial Services managing director Darius McDermott outlines why he believes Europe could outperform the US this year.
The US market has been a great place to invest since the financial crisis began in 2008. It has outperformed Europe in six of the past eight years. From 1st Jan 2008 until now, the European market is up just 17.39% compared with a rise of 107.9% in the US. A remarkable difference.
However, the first eight years of the millenium painted rather a different picture, with the European stock market being the better investment. It outperformed the US stock market in seven out of eight calendar years from 1st Jan 2000 to 31st December 2007. Over the whole period this resulted in the European market returning 40.39% while the US market lost 11. 31%.
Now that things are starting to return to ‘normal’ in the world’s largest economy, with interest rates starting to rise, will its current run of good fortune continue in 2016 or will the tide turn once again? GDP data is already starting to deteriorate and it is possible that the Federal Reserve may have to cut rates again in the new year. Embarrassing and unsettling for markets, but at least the Federal Reserve would have something to cut now I suppose. I’d say the odds are actually stacked in Europe’s favour.
Here’s five reasons why:
1) Europe has only just started pumping money into its economy in the form of quantitative easing (QE). The history of the past few years, whilst not a guide to the future, suggests that QE is good for the domestic stock market.
2) Data in the European economy is also finally starting to improve, albeit from a low base. Private consumption is benefiting from a low oil price, there has been a gradual improvement in the labour market with unemployment at its lowest level since January 2012 and growth momentum remains solid with healthy developments in both the manufaacturing and services sectors.
3) It’s also an election year in the US, which is typically volatile for the domestic stock market, with so much political uncertainty. There may be a ‘relief’ rally or a ‘glad it’s all over’ bounce once the president has been decided, but we have to wait until the end of November for that.
4) This year buybacks and dividends in the US exceeded $1 trillion. A huge wall of money is pushing the market higher. However, US companies may be robbing themselves of growth by not investing for the future. It has also been argued that buybacks may be killing economic growth. This may hurt future stock performance. While the underlying dividend growth in Europe is strong, buybacks are not so prevalent.
5) Finally, and most importantly in my view, the European market is cheaper compared with both the US market and its own history – and I’ve generally found in my career that it is easier to make money when you buy something that is cheap rather than when it is expensive.
If you are interested in dipping your toe back in the European waters, Elite Rated funds in this sector include Baring Europe Select, BlackRock Continental European, Henderson European Selected Opportunities, Jupiter European and Threadneedle European Select.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.
All performance data sourced from FE Analytics. Looking at the S&P 500 and MSCI Europe over the periods specified and up to 22nd December 2015. Total returns in GBP.