Advisers add European equities to portfolios in 2024

Financial advisers are allocating more money to European equities as experts point to the attractive valuation of companies relative to US counterparts.

The number of accounts buying listed European Exchange Traded Funds (ETF’s) via AUISEX, has spiked 49% higher in 2024, outstripping volumes for many other single geography funds. March 2024 traded value also increased 170% month-on-month whilst net traded value (the value of buy trade less sell trades) also increased by a factor of three. The trends mirror buying by global fund managers, with a Bank of America survey released in March showing asset managers held the biggest overweight position to the region since February 2022. 

“The STOXX Europe 50 Index charged 12.9% higher, in euro terms, over the opening quarter [of 2024], outpacing the S&P 500 Index, which ended up 10.6% higher in dollar terms,” Lazard Asset Management’s European equity team recently wrote.

“Outperformance by European mega-caps versus the broader US stock market has extended a trend that dates to late-2022, a trend that may have passed many investors by, given that US mega-cap technology stocks have often seemed like the only game in town,” they said.

The bulk of international ETF trading via AUSIEX still occurs in the diversified global funds which typically form the core of most offshore equity portfolios. However, it appears advisers are seeking to add extra value for clients by capitalising on the potential for European blue chips, in particular, to continue outperforming other markets.

Market leaders

The STOXX Europe 50 Index includes shares in 17 markets, with French companies (24.9%), UK stocks (23.3%) and Swiss equities (17.2%) accounting for the majority of constituents as at March 30. German companies account for another 13.5%, with the remainder split between entities in countries such as the Netherlands, Denmark, Spain and Italy.

According to Lazard Asset Management, no particular sectors drove its quarterly gains and the best performers instead were companies which beat earnings expectations.

This included growth companies such as Danish health care company Novo Nordisk B, whose products include diabetes drug Ozempic and weight loss drug Wegovy. Dutch semiconductor equipment vendor ASML Holdings also rose sharply after reporting its results and is widely expected to benefit as artificial intelligence fuels increased demand for its products.

“The extended rally in US technology stocks has made it a good time to start looking elsewhere for opportunities. Many European growth stocks have similar traits to US counterparts but appear better priced and we have considered building our exposure to those companies,” said Daniel Choo, Senior Portfolio Manager at Russell Investments.

European ETF’s traded via AUSIEX in 2024 include Betashares Europe ETF (ASX: HEUR), Global X Eurostoxx 50 ETF (ASX: ESTX), iShares Europe ETF (ASX: IEU) and Vanguard’s FTSE Europe Shares ETF (ASX: VEQ). 

Earnings caveat

JP Morgan Asset Management is another big fund manager to suggest investors should reassess underweight positions to Europe but it also says muted earnings growth expectations relative to other major developed markets limit the strength of its conviction.

“The attractiveness of the region’s equity market is rising, given a widening valuation gap to the US, which is extending at the sector level. Economic momentum is also building, and the potential earlier start to the rate cutting cycle by the European Central Bank would support both the economic and corporate outlook,” JP Morgan Asset Management Global Strategist, Kerry Craig, recently wrote. 

“The headwind to a strong investment case for European equities is the current earnings outlook. For the 2024 calendar year, consensus earnings growth for the MSCI Europe index is 4%, rising to 11% in 2025,” Craig said.

“This is an improvement on prior years, including 2023’s flat outcome, but the pace of expected earnings growth is not as fast as other regions such as the US, or parts of emerging Asia outside of China.”

Principal Asset Management points specifically to UK stocks as a means of gaining access to global growth dynamics at a discount.

“Among the largest 100 UK-listed companies, over 70% of their total revenues are derived from foreign sales,” said Scott Leiberton, a Managing Director and Client Portfolio Manager at Principal Asset Management.

“Importantly, these companies are trading at historic valuation discounts, presenting a potential opportunity for investors. Furthermore, the weakness in exchange rates has enhanced the export pricing competitiveness of many of these companies, adding to their appeal,” Leiberton said.

Green opportunities

A specific area of interest for investors may be Europe’s world-leading energy stocks, which Lazard Asset Management said have rebounded after struggling in 2022-23 due to the Ukraine war, supply chain headaches and rising interest rates.

“Investors have returned to the sector now that these challenges have mostly dissipated. Danish company Vestas, the world’s leading wind turbine manufacturer, recently reiterated a growing demand outlook for its turbines and easing cost pressures in its annual results,” Lazard Asset Management’s team wrote.

“Elsewhere, Alfen, a Dutch company that makes electric charging stations and storage systems, has the potential for significant growth as green infrastructure builds across Europe,” it said.

Europe has clearly emerged on advisers’ and investors’ radars as a potential source of gains in 2024; much now rests on whether its economy and stockmarkets can perform as expected.