Why Investors Are Looking to Buy Up European Equities For Cheaper US Exposure
In this article, I will discuss a recent trend in equity markets which has seen investors turn to European equities to gain affordable exposure to the US market. This blog will explore how this strategy works, why it's gaining popularity and what it means for both the European and US markets.
5/8/20242 min read
Recently, investors seeking returns from a thriving US economy have turned to European stocks which have large US exposure, but are trading at a discount in comparison to US equities. Names such as BAE systems and Novo Nordisk are among the large European companies that have seen their stock prices spike this year as investors search for discounted versions of top performing US stocks. BAE is up 17% and Novo Nordisk has gained 11%.
Expert investors have described these lower valuations as being "heavily overlooked" and it is a pricing inefficiency that will "continue to be exploited for as long as it is expected to continue." A strong labour market report from the US, with 254,000 jobs being created (US Bureau of Labor Statistics) has further contributed to this trend and strengthened investor expectations that there will not be a US recession and that employment will be strong and inflation will continue to remain under control. In addition to the strong job creation statistic released by the BLS, average hourly earnings for all employees rose 0.2%, again smashing investor expectations and solidifying the strong position of the US economy. This is also the first time that we are beginning to see a reversal of a previous trend where "bad news" from the labour market could sometimes be seen as "good news" since bad news meant further rate cuts. However, in the wake of this report, there has been no negative market reaction to suggest that investors are worried about the Fed not introducing further rate cuts in their next meeting, the market is still expecting a 25 basis point cut come early November 2024.
Despite the US economy smashing expectations, the outlook for Europe has been more negative recently, with business activity slowing and inflation falling. Having said this, hundreds of European countries generate a majority of their revenue from the USA with BAE Systems having 50% of it's turnover contributed to the States. On the other hand, Novo Nordisk, a pharmaceutical giant and Europe's largest company by market cap has trailed US counterpart Eli Lilly, whose shares have risen 51% this year. Some may argue this makes it a more attractive investment since Novo Nordisk boasted a diluted earnings per share (EPS) of $4.49 in July 2024 compared to just $3.28 for Eli Lilly.
With further rate cuts expected in the US, many European companies with large US exposure look to benefit from increased demand. Goldman Sachs has confirmed this trend with them urging clients to build positions in roughly 45 European businesses with large US exposure to achieve higher growth. The current trend we are seeing with European stocks becoming more attractive is interesting as their US exposure is not a new trend, what's changed is that US equities are now selling at a much larger premium.