Investors Search for Opportunity in Unloved Corner of Stock Market
Europe is slowly limping its way through the sluggish economic recovery after some investors, lured by the region’s economic gloom lifting, have started investing in its stocks. European stocks have demonstrated a healthy performance this year after the benchmark Stoxx Europe 600 hit 16%, a mark slightly behind the U.S. S&P 500 that is currently at 17% (Chilkoti, 2019). However, despite the sign of improvement, Europe is still performing poorly compared to other developed markets. U.K. and euro zone stocks are the least preferred investments for fund managers, according to the recent Global Fund Manager Survey by the Bank of America Merrill Lynch (Chilkoti, 2019). Investors remain pessimistic due to the lack of technology companies in Europe, a sector that has strengthened the U.S. stock markets. However, the implementation of economic fiscal policies in other countries is expected to drive growth in the region.
Europe’s slow economy has been exacerbated by the political uncertainty emanating from Brexit, German’s stunted growth, and government finances in Italy. Talks of tariffs on U.S. exports, and the European Central Bank’s lower hopes for growth in March have also tainted the economic mood. The euro, compared to the U.S. dollar, is at 22-month low. As a result, returns for U.S. dollar-based European investors are severely suppressed while the export-oriented companies become highly competitive. Also, the 10-year German government bonds are acutely underperforming, registering -0.019% (Chilkoti, 2019). Such occurrences have undermined investments in the region’s stock markets, with net withdrawals throughout 2018 except for only two weeks. In 2017, the view on Europe’s economy brightened during elections when the French President promised to push economic reforms. Investors injected huge amounts of money in European equities, a move that later proved to be the worst investment decision.
The relatively smaller technology base of Europe has prominently featured in the discussions of the region’s poor economic performance. According to Zilner, Europe’s highly fragmented market is a major barrier of technological growth (2019). Europe, compared to U.S. and China, has numerous languages, different cultures, and regulations that increase bureaucracy, which lowers the decisiveness and the response of businesses. Also, compared to the U.S., Europe has less invested in higher education to promote technological learning, which is a foundation of technological development in a country. While the European economy is laced with negative attitudes, Emiel van den Heiligenberg of Legal & General Investment Management anticipates growth in the next month due to friendly fiscal policies being implemented across countries (Chilkoti, 2019). Emiel points out that China will be the biggest player in crystallizing the region’s markets. In 2019, for instance, China has expanded its budget from a deficit ratio of 2.6% to 2.8% (Chen & Woo, 2019). If policymakers balance the need for growth after a slow 2018, global investments are likely to bloom, including the European region.
Although European stocks have proved to be weaker against other developed countries, there is hope of recovery due to the generous fiscal policies across trading partners including China. The comeback will slowly attract back the investors who had lost faith in the market. The country can also focus on growing its technological sector since it has proved to be a significant driver of growth. Europe can also invest more in higher education to reinforce subjects like engineering and computer science in colleges and universities, which would attract superior companies and entrepreneurs.
References
Chen, Y. & Woo, R. (2019, March 7). China says higher 2019 budget deficit will spur growth, won’t open flood gates. Reuters. Retrieved from https://www.reuters.com/article/us-china-parliament-finance-budgets/china-says-higher-2019-budget-deficit-will-spur-growth-wont-open-floodgates-idUSKCN1QO08R
Chilkoti, A. (2019, April 28). Investors search for opportunity in unloved corner of stock market. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/investorssearchforopportunityinunlovedcornerofstockmarket11556449200
Zilner, M. (2019, Feb 14). Why is Europe lagging behind in the tech race?. European Generation. Retrieved from https://www.europeangeneration.eu/single-post/2019/02/14/Why-is-Europe-Lagging-Behind-in-the-Tech-Race