The Economist – Why investors are not buying Europe’s revival

European stocks saw a modest 4.3% earnings growth in Q2 2024, boosting the Stoxx 600 index. However, despite attractive valuations and improving economic indicators, investors remain cautious. Concerns over Europe's sluggish economy, weak demand, and specific industry challenges, particularly in the automotive and luxury sectors, suggest that optimism may be premature..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..From The Economist, published under licence. The original article can be found on www.economist.com© 2024 The Economist Newspaper Limited. All rights reserved..The Economist.Even though the continent's stocks are in a "sweet spot" .___STEADY_PAYWALL___.The profits of European listed firms rose during the second quarter of this year. In much of the rest of the world, that would be unremarkable. On the old continent, 4.3% earnings growth in the three months to June, compared with the year before, was enough to provide a boost to the Stoxx 600, its benchmark index. After all, the growth came after four consecutive quarters of falling earnings. Markets strategists are now talking up European stocks. Morgan Stanley, an investment bank, even says that they are "in the sweet spot"..Yet this optimism may be misplaced. It is, ultimately, based on two things. One is a better economic situation. After a year of stagnation, GDP across the European Union grew by 0.3% in the second quarter, against the previous one, while annual inflation fell to 2.8% in July—not far from the European Central Bank's target of 2%. ECB policymakers felt sufficiently confident to cut interest rates in June and are expected to do so again in September. The second thing is the cheapness of European stocks. The Stoxx 600 trades at a price-to-earnings ratio of 15, against 26 for America's S&P 500 index. In other words, European shares trade at a 40% discount..PIC.Part of the reason for the alluring bargain is the make-up of the European market, not least the heavy weighting of the automotive and luxury industries. Carmakers are suffering because of growing fears about a renewed global trade war, particularly if Donald Trump returns to the White House in November, and profit warnings at several high-profile firms. Meanwhile, luxury-goods manufacturers are hampered by concerns about the outlook for Chinese demand, as the country's housing crisis and other economic problems drag on..Even on an industry-by-industry basis, however, European firms remain considerably cheaper than their American counterparts, indicating that something else may be at play. Indeed, despite ever-more attractive valuations and the better news of recent months, many investors are still not entirely sold on Europe. Since mid-April the price of a basket of stocks that would do well if the European economy thrives, which includes companies in consumer-focused industries such as media and retail, has risen by 6%, comfortably underperforming a defensive basket, which includes companies in stodgier industries such as health care and utilities, and which has gone up by more than 11%..Asset managers appear to be considering the chance of a slowdown, rather than rushing to gain exposure to an upswing. This is not unreasonable. Even if there are signs of improvement, Europe's economy has grown by just 4% since before the covid-19 pandemic, compared with 9% in America. And there are continued worries about the weakness of European demand, as well as stagnation in Germany, the continent's usual economic motor. Without some sort of big break that prompts investors to reassess the continent, the share-price discount will not shrink. As anyone who has held European stocks over the past decade knows all too well, cheap assets can stay cheap for a very long time.

The Economist – Why investors are not buying Europe’s revival

The Economist

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