Investing in European Markets
The Empire Strikes Back?
Hello fam, welcome back! As always, check out the blog for all our past content (and our latest post on investing in Asia, ICYMI).
So for the final edition of our three-part “global investor” series, we’re going to focus on Europe - a region that is sometimes forgotten between the attention-grabbing headlines coming out of the U.S. and enormous untapped potential in Asia. Just like with Asia, no two stock markets in Europe are the same. It contains some of the oldest and most open markets in the world (the U.K., France, Germany) as well as newer “frontier” markets such as the Baltic states and Russia.
We’re going to focus on the larger markets in Western Europe given that those are the ones you’re most likely to put your investment $ into, but we’ll also skim over your options in the smaller ones.
What Makes the European Economy Tick?
Before we zoom in and get into the specifics of investing in each market, let’s take a step back and think big picture for a second.
Europe is unique in many regards. European companies are among the world’s top car producers, energy refiners and pharmaceutical distributors. However, the makeup of its most successful companies has not changed in decades. Compare this to the U.S., where the top American companies today (Apple, Facebook, Google, Tesla) look very different to the ones our parents grew up with (GE, Ford, ExxonMobil).
While its companies might appear stagnant, Europe is home to countries with some of the highest living standards in the world. It has already achieved the wealth that much of the world is still striving for. Its population enjoys affordable healthcare and education, strict labour laws and open borders. It is at the forefront of the push to adapt green energy and more sustainable living practices. At the end of the day, isn’t that where we’re all trying to get to?
While that may be true, the realities of an aging population and shrinking tax base are nonetheless beginning to catch up with many European economies: recall the back-to-back debt crises seen in Greece, Portugal and Spain. Although Western Europe remains in decent shape, is that going to be enough to keep the continent relevant to the next era of global growth?
What’s the Outlook for Europe?
In some ways, Europe at the moment is a value investor’s dream. Its core of “old economy” powerhouses have been laid low by the pandemic, but these firms could be poised for blockbuster returns as European countries begin to open back up and business activity resumes. So if we’re thinking short-term, buying downtrodden carmakers, luxury goods producers (and of course pharma giants) is an approach many investors are implementing as a way to ride the post-Covid wave.
How about if you want to invest more long-term? This one’s not as easy to answer. It all comes down to whether old-school, consumer goods firms such as BMW and L’Oreal can successfully reinvent themselves for the next few decades of global growth. While you might find the odd diamond in the rough that is worth your attention, a generic “long Europe” basket might not do as well given the continent’s challenging demographic and fiscal conditions.
How Can You Invest?
Western European economies such as the U.K, Germany, Italy and France are similar to the U.S. in terms of market access and ease of investing. Pretty much anyone with a few GBP in their account can buy British stocks - no questions asked.
The same is true of smaller nations such as the Scandinavian economies and Poland, though they tend to have just a handful of exchange-listed firms. The only real headache when it comes to European investing is Russia. You’re better off simply buying U.S. or U.K.-listed Russian firms (similar to Chinese and Indian overseas listings) and saving yourself all the paperwork.
There’s a lot to unpack here! Europe tends to be viewed as a bit of an investment Rubik’s Cube with its mix of older, industrialized nations that are further along the wealth curve than most other places on earth. Many investors have in fact been quick to write it off… but as the world increasingly pivots to green energy and zero waste solutions, there could yet be a third act in the cards.