Investing in European markets: Opportunities you must not miss in 2024

Why European Markets Deserve Your Attention

For years, many investors have overlooked European markets, considering them lacking relevant technological leaders. However, this perspective is based on superficial analysis. European markets are undergoing a significant transformation that creates interesting opportunities for diversified portfolios.

The reality is that the Old Continent’s economy offers attractive valuations compared to its U.S. peers. Sectors such as communication services, discretionary consumption, consumer staples, energy, financials, materials, and essential services are trading below their ten-year historical averages. Far from being a weakness, this presents an attractive entry point.

Consider the case of ASML, a Dutch company valued at €215.9 billion, a leader in lithography technology for semiconductors. Its strategic position in the global chip competition illustrates that Europe hosts corporate champions in cutting-edge sectors.

Understanding the Structure of European Markets

European markets do not operate as a single centralized platform but as an ecosystem of interconnected exchanges functioning under different regulatory frameworks. Frankfurt, London, Amsterdam, Paris, and Madrid are hubs of stock market activity with their own characteristics.

For investors seeking exposure without analyzing dozens of individual companies, stock indices offer an elegant solution. These aggregates replicate the combined performance weighted by market capitalization, allowing capturing the overall movement of each market.

The Main Indices You Should Know

DAX 40: Germany’s benchmark, comprising the 40 most liquid companies in Frankfurt. Giants like Siemens, Volkswagen, Adidas, and Deutsche Bank make up this index, considered a thermometer of Europe’s most robust economy. Its performance in 2023 reached 6.82%.

FTSE 100: Representative of London with its top 100 market caps, covering approximately 80% of the UK’s total market value. Includes AstraZeneca, Unilever, Vodafone, and BP. It recorded a negative performance of -1.27% in 2023, affected by the UK’s economic weakness.

Euro Stoxx 50: This pan-European index tracks 50 leaders of the eurozone across multiple nations. Comprising Airbus, LVMH, TotalEnergies, ASML, and Santander, it achieved a 6.45% annual gain last year. Its balanced composition makes it ideal for those seeking diversified exposure.

IBEX 35: The main representative of the Spanish stock market with its 35 most active stocks. BBVA, Inditex, ArcelorMittal, Iberdrola, and Repsol are notable components. Surprisingly, it was the best European performer with 9.72% in 2023, nearly matching the U.S. S&P 500.

CAC 40: French index reflecting 40 of the largest companies listed on Euronext Paris, including Alstom, BNP Paribas, L’Oréal, Renault, and Stellantis. Generated a return of 5.29% during 2023.

Key Factors Driving Current Market Behavior

The European macroeconomic landscape is defined by three crucial dynamics.

Inflation on a downward but persistent trajectory: Interest rate hikes have successfully contained sustained price growth. However, rates remain high, suggesting that central banks will maintain a restrictive stance for an extended period. This reality weighs particularly on valuations of growth companies, especially tech, while benefiting the financial sector.

Slowed economic activity: The post-COVID crisis combined with geopolitical consequences has generated uncertainty about the magnitude of future economic slowdown. Manufacturing and services PMI indices in the eurozone and the UK remain below 50, indicating contraction. The central question is whether Europe will experience a soft landing or a more abrupt one.

Solid labor market with rising real incomes: Despite higher interest rates, unemployment in the eurozone fell to a historic low of 6.4%. Simultaneously, wage prospects have improved significantly, with an annual growth of 4.6%, surpassing inflation. This dynamic supports consumption and provides economic resilience.

Sectoral Transformation of European Markets

Since 2010, the composition of European markets has undergone profound reconfiguration.

Winning sectors include information technology (rose from 2.9% to 6.7%), health (9.7% to 16.1%), industry (11.3% to 15.0%), and discretionary consumption (8.9% to 11.3%). Conversely, finance, materials, energy, telecommunications, and basic services have decreased their relative weight.

Compared to the U.S., European markets exhibit greater diversification, where technology accounts for nearly 30% versus 6.7% in Europe. This balance reduces vulnerability to sector-specific crises, making index investments particularly attractive for conservative profiles.

Internationalization of Corporate Revenues

A revealing aspect from the income sources analysis: by 2023, only 42% of profits from listed European companies come from Europe itself, compared to 61% in 2012.

The remaining 58% are generated globally, with North America representing 26%, and emerging markets (Latin America, Africa, Asia) accounting for 25%. This characteristic makes European markets vehicles for capturing global growth, not limited geographically.

Valuation Perspective: Is It Time to Invest?

The critical question: Do European markets currently present genuine opportunities?

Seven out of ten major sectors have P/E ratios below their decennial averages. This indicates that stocks are trading at relatively accessible prices compared to their historical values. The economic slowdown explains this temporary discount.

However, as Europe completes its monetary normalization cycle — predicted for the second or third quarter of 2024 — valuations should experience upward rerating. If the economic landing is soft, the catalyst for appreciation will be present.

Geopolitical risks persist: chronic Ukraine conflict and instability in the Middle East add volatility. Still, the relative strength of the European economy within its slowdown maintains possibilities.

Final Recommendation for Investors

Lazard Asset Management analysts concluded that Europe’s valuation discount relative to global markets should decrease, not widen. The current paradox of undervalued European assets is unlikely to persist indefinitely.

For medium- to long-term investors, exposure to European markets via indices offers geographic diversification, sectoral balance, and access to world-class companies without requiring granular analysis of hundreds of issuers. The transitioning macroeconomic context and comprehensive valuations create a confluence of opportunities that should not be ignored.