European equities seem to offer relative value, but that’s a trap

  • Using the S&P 500 (SPY) as our reference, we get several positive value indicators for the STOXX 600.
  • China and the US are at the forefront of the tech race. Europe has fallen behind very significantly.
  • For that reason, European equity indexes will perform structurally worse than their US counterparties.

(Source: DennisM2)

Scanning the global markets for value, always, makes me stop in Europe. Using the S&P 500 (SPY) as our reference, we get a P/E ratio of 20.84, a P/BV of 3.27, and a distribution yield of 1.56%.

Table 1 – Portfolio characteristics of S&P 500 ETF

(Source: iShares)

Now, looking at the STOXX Europe 600 (DJXXF), we get a P/E ratio of 15.85, P/BV of 1.77, and a distribution yield of 3%.

Table 2 – Portfolio characteristics of STOXX Europe 600 ETF

(Source: iShares)

Comparing both indexes, we can see that there appears to be relative value in Europe. However, it is my conviction that digging just a little bit deeper, reveals that Europe is just a value trap.

The US develops tech, China copycats and Europe taxes it.

Looking back to the last decade, we can see a definite trend where the US has been developing the exciting tech in the world, Chinese companies have been copying it, and the EU has been furiously taxing it.

That has left China, and the US, at the forefront of the tech race. Europe has fallen behind very significantly. Just ask yourself, what is the most popular European search engine Or even, what’s the most important online retailer, or the most known social media company? Well, I don’t know the answers to those questions. We have to face the fact that there aren’t comparable European companies in those fields. To confirm it, compare the top ten holdings of the tech sectors, in both the S&P 500 and the STOXX 600.

Table 3 – iShares S&P 500 Information Technology Sector UCITS ETF

(Source: iShares)

Table 4 – iShares STOXX Europe 600 Technology UCITS ETF (DE) top 10 holdings

(Source: iShares)

The biggest European tech company in the index is the SAP (SAP), which is a $142 billion corporation. Second on the list is ASML (ASML), which is a $90 billion company, and then Amadeus (AMADY), a $33 billion corporation. Compare that with the top 3 tech companies in the S&P, Microsoft (MSFT), Apple (AAPL), and Visa (V). We are talking about more than $2 trillion. And, it’s like the US technology is not making money, Apple and Microsoft are cash-cows.

When a downturn occurs, investors will ditch high valuation stocks, and the tech sector has lots of them. Nevertheless, many of this last wave of tech stocks are disruptors that will destroy the business models of many European companies. And, the European tech sector is missing in action. Since tech will be fundamental for indexes returns during the next decade, the absence of good companies in the field spells doom and gloom for European equity indexes.

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Disclosure: I/We have no positions in the securities mentioned in the article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This text expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, wherever there is the potential for profit there is also the possibility of loss. Additionally, the present article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Some information and data contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. The author trusts that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.


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