Why now is a good time to pay attention to the European stock market

Rethinking the True European Stock Market

Many people think of the European stock market as a single trading venue, but in reality, this perception is entirely mistaken. The European stock market is not one unified entity but a collection of markets across numerous countries and regions. Major exchanges such as the London Stock Exchange, Frankfurt Stock Exchange, Euronext Paris, and SIX Swiss Exchange operate independently, each following different regulatory frameworks, yet they are closely interconnected. Investors can trade stocks of listed companies from the EU and other European countries through these platforms.

In simple terms, the European stock market is a vibrant ecosystem. When we talk about the “European stock market,” we usually refer to the most representative markets within this ecosystem and their performance.

What Is the Current State of the European Economy?

The European stock market is currently facing a complex and contradictory situation. On one hand, the European Central Bank’s continuous interest rate hikes have effectively controlled inflation; on the other hand, economic growth has noticeably slowed, with varying performances across countries.

Inflation is easing, but high interest rates remain the norm

Data shows that annual inflation rates in European countries are steadily declining, which is good news. But the bad news is that inflation levels are still relatively high, meaning the ECB is unlikely to significantly cut interest rates in the near term. High interest rates are particularly unfavorable for growth-oriented companies, especially tech stocks, but they benefit banks and financial institutions. This creates structural differences within the market.

Insufficient economic momentum: hard landing or soft landing?

Manufacturing and services PMI (Purchasing Managers’ Index) are both below 50, indicating a slowdown in European economic activity. The aftermath of COVID-19 and uncertainties from the Ukraine conflict make it difficult to predict whether Europe will experience a mild slowdown (soft landing) or a more severe recession (hard landing). This uncertainty directly impacts market confidence.

Employment market surprisingly resilient

This is the surprising part. The Eurozone unemployment rate fell to a historic low of 6.4% in summer, and consumer real income prospects are improving. Particularly, the highly unionized European labor market has driven wage growth, with the Eurozone’s annual wage increase reaching 4.6%, already surpassing inflation rates. Stable employment and income growth support consumer spending, which could serve as a defensive line for the European economy.

How to Participate in European Stock Market Investment

For retail investors, tracking thousands of listed companies across major European exchanges is time-consuming. At this point, stock indices become your “lazy investment” tools. Through indices, you can invest in the overall market performance with a single click. These indices are usually weighted by market capitalization, giving larger companies more influence; a rising index indicates strength in its main components.

Moreover, these indices have become underlying assets for various financial products such as futures, options, CFDs, and ETFs, offering a wide range of choices.

Scan of Europe’s Five Key Indices

DAX 40: The Barometer of Germany’s Economy

This index represents the 40 largest companies listed on the Frankfurt Stock Exchange. As a symbol of Germany’s largest economy, DAX 40 is regarded as an important indicator of the overall health of the European economy. Major companies like Adidas, Siemens, Volkswagen, Deutsche Bank, and Mercedes-Benz are included. By the end of 2023, DAX 40 had risen by 6.82%.

FTSE 100: The flagship of the London Market

The FTSE 100 on the London Stock Exchange includes the 100 largest companies, representing over 80% of the UK stock market’s market cap. The index features high liquidity and transparency but also faces currency fluctuations and geopolitical risks. In 2023, it underperformed, declining by 1.27% for the year, reflecting the UK’s economic weakness. Key constituents include AstraZeneca, Unilever, Vodafone, and BP.

Euro Stoxx 50: The representative of the Eurozone

This index selects 50 leading companies from the Eurozone, covering 11 countries and multiple industries, designed by STOXX under Deutsche Börse Group. Major components include Airbus, LVMH, TotalEnergies, ASML, and Santander Bank. It is widely used as a benchmark for the Eurozone economy and as the underlying for various financial derivatives. By the end of 2023, it increased by 6.45%.

IBEX 35: The pulse of the Spanish market

As the main index of Spain’s BME (Bolsas y Mercados Españoles), IBEX 35 tracks the 35 most liquid companies listed on the Madrid Stock Exchange. The index is weighted by market cap and rebalanced semiannually. Major constituents include BBVA, Inditex, ArcelorMittal, Iberdrola, and Repsol. It performed best in 2023, rising by 9.72%, nearly matching the S&P 500.

CAC 40: The microcosm of France’s economy

This is the most important index of Euronext Paris, representing the top 40 of France’s 100 largest listed companies. It is weighted by free float market cap and widely used as the underlying for structured products, funds, and options. Key holdings include Alstom, BNP Paribas, L’Oréal, Renault, and Stellantis. The 2023 gain was 5.29%.

Europe’s Stock Market Is Quietly Transforming

Deep Structural Adjustments in Industry Composition

Since the 2008 financial crisis, the landscape of the European stock market has undergone significant changes. From 2010 to 2023, the sector weightings have shifted noticeably:

Industrials, healthcare, consumer discretionary, and information technology have increased in weight. Notably, information technology grew from less than 3% to 6.7%, a modest increase compared to the nearly 30% share in the US, but a trend worth watching.

Conversely, traditional sectors like financials, materials, energy, telecommunications, and utilities have declined in weight. This reflects the evolution of the global economic structure and shifting market focus. These changes are slow but directionally clear.

Diversification advantage: not all eggs in one basket

A fascinating contrast emerges when comparing the US and European markets. The US stock market is dominated by tech stocks, with a 30% weight in information technology; whereas Europe’s industry layout is more balanced, with tech stocks only at 6.7%. This means that any crisis in a single sector will have a relatively smaller impact on Europe.

This diversified structure is particularly suitable for index-based investing. With no over-concentration in any one industry, investors can achieve more stable average returns.

Europe’s Companies’ “Global Gold Rush”

This data vividly illustrates the point: nearly 60% of revenue for European listed companies now comes from outside Europe. In comparison, in 2012, 61% of revenue still originated domestically within Europe, marking a dramatic shift.

North American markets contribute 26% of revenue, while emerging markets (including Latin America and Africa) provide 25%. In other words, the European stock market is essentially a window to global growth. Even if the European economy remains sluggish, these companies continue to grow through international business.

Is Investing in Europe’s Stock Market Worth It Now?

Valuation attractiveness emerges

As of September 2023, in terms of P/E ratios, seven out of ten major European sectors traded below their ten-year average levels. This includes telecommunications, consumer discretionary, staples, energy, financials, materials, and utilities.

Low valuations reflect the slowdown in Europe’s economy but also create opportunities. Once the ECB begins to cut rates (expected in Q2 or Q3 2024), these undervalued assets could be re-rated.

Geopolitical risks are a double-edged sword

The Ukraine conflict and rising tensions in the Middle East have indeed cast a shadow over Europe. Oil price fluctuations, supply chain uncertainties, and increased defense spending can impact the stock market. But so far, Europe’s economy has shown resilience under these pressures.

Why Now Might Be an Opportunity Window

If US stocks are overvalued, then the discount on European stocks might be exaggerated. Markets tend to overreact, and investors should break free from stereotypes about Europe. Companies like ASML (market cap of €215.9 billion), a semiconductor equipment firm headquartered in the Netherlands, are strategically vital in the chip war, demonstrating that Europe can also produce global-level enterprises.

How Will the European Stock Market Perform in 2024?

Looking at the full-year performance of 2023, the results across European indices have been mixed. IBEX 35 performed the strongest, nearly matching the S&P 500’s gains; DAX 40 followed closely; Euro Stoxx 50 and CAC 40 also performed well; only the FTSE 100, weighed down by the UK’s economic difficulties, ended in negative territory.

Entering 2024, all indices have been under downward pressure since late July, with the Middle East conflict adding to this stress. But from a longer-term perspective, the valuation attractiveness, economic resilience, and industry transformation in Europe offer opportunities for medium- and long-term investors.

Key catalysts include: when interest rates peak, when the ECB begins to cut rates, how geopolitical developments unfold, and whether corporate earnings can stabilize and grow. Once rates start to decline, the suppressed valuations could quickly recover.

The current European stock market is like an overlooked opportunity—cheap valuations, solid fundamentals, and ongoing industry upgrades. Investors with different risk tolerances can find suitable entry points here. The key is to break free from traditional perceptions and re-evaluate this market full of potential.