INSIGHTS BLOG

THE RETURN OF EUROPE

Mark Lister, 8 June 2021

Most of the world's sharemarkets have been strong performers of late, with world shares rising another 1.6 per cent in May and clocking up a return of 11.9 per cent so far in 2021.

Europe has been the best performing region in recent weeks, even outpacing the mighty US market (which has been no slouch either).

European shares are up 15.5 per cent this year, having recovered to their pre-pandemic levels and finishing last week at a fresh record high.

This strong performance has started with a recovering economy and improved earnings growth prospects across the bloc.


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Having suffered from ongoing waves of COVID-19, much of Europe has spent far longer in lockdown than those of us in New Zealand, Australia or even the US.

However, that's changed dramatically over the last three months, in part driven by some serious progress when it comes to the vaccine rollout.

In Germany, Italy and France, more than 40 per cent of the population has had at least one dose. In late March, those figures weren't even in double figures.

The UK, still a close friend and important trading partner of Europe, is even further ahead with about 60 per cent of people having received at least one dose.

This is a recipe for optimism, and it's driving a rebound in confidence and a resurgence in economic activity.

One useful lead indicator of where economic growth is headed are the Purchasing Managers’ Indices (PMIs), collated by IHS Markit each month. For the Eurozone, this measure tells us things are good, and getting better.

Last month, the PMI in Europe rose to 57.1. This was well above the breakeven level of 50, the third successive month of expansion and the best recorded since early 2018.

New work for the private sector rose to the strongest degree since 2006, and business optimism for the year ahead hit its highest level in more than 17 years.

Another reason for the strength of European shares in 2021 has been the type of companies that dominate most of the region’s bourses.

The largest sectors are industrials and financials, with a combined weighting of more than 30 per cent. Consumer discretionary is also well represented at almost 14 per cent while materials and energy make up another ten per cent or so.

These sectors are more sensitive to changes in economic growth, which means they get hit harder when economic clouds are on the horizon but rebound more strongly when the skies clear.

Some of them, notably banks and financials, should also be better positioned if we see inflation rise and interest rates creep higher.

Contrast this with the US, where more than a quarter of the sharemarket is dominated by the technology sector. That proportion is much higher if we include some of the big tech companies that are officially categorised in other sector groups.

Having performed so well during the events of last year, the next year or two might be a bit more subdued for some of these companies. Those with growth prospects that extend a long way into the future could also be impacted by any sustained rise in interest rates.

The technology sector includes some of the greatest companies (and long-term investments) around, and I’d also argue that the US is home to the world’s best businesses, full stop.

However, 2021 might well be a case of “right place, right time” for Europe.