Martyn Hole (Capital Group) | Even if it is true that US equity markets have outperformed regional markets over the last decade, profitability based on indices, which is what most investors focus on, does not tell the whole story. If we analyse the companies in an independent way, the situation is very different from what we might think.
Since 2009, many of the 50 companies with the best annual profitability were based outside the US. During much of the subsequent ten years, between 80% and 90% of them were based in other countries.
In certain sectors, the US is not the dominant region. Many of the leading companies in the luxury sector, like LVMH and Kering, are based in Europe. Let´s think also about Louis Vuitton, Fendi and Gucci. Japan has numerous cutting-edge robotics companies, like Murata and Fanuc. Among the major pharmaceutical companies we find several innovative companies in Europe, like Astrazeneca, Novartis and Novo Nordisk.
In addition, non-US companies who pay dividends usually offer superior returns. All these reasons justify a significant allocation of resources in global equity, even when we think that US markets will remain in the lead.
Moreover, from an economic point of view, Europe remains firm despite the difficulties. Recently the ECB dissipated concerns about a premature tightening of monetary policy by announcing that interest rates would remain unchanged throughout 2019.
We have also seen encouraging signs about the European economy. PMI data for the manufacturing sector have stabilised, including in Germany and Italy, and the construction and services sectors have registered solid activity.
In fact, the European economy has appeared surprisingly firm: unemployment has fallen in the majority of economies, except in Italy, and the increase in wages and reduction in inflation have driven real incomes. Governments have softened fiscal policy, cutting taxes and increasing public spending. All this has favoured the consumer. Corporate investment has continued to grow. The result is that Eurozone GDP has strengthened in the first quarter of 2019.
One of the region´s main problems is political uncertainty, and the possibility that Europe will become the new target of US trade war. Even so, valuations in European markets offer certain support. The PER ratio, adjusted for the cycle, of the US MSCI index is 27, compared to 15 for the European MSCI index. That valuation discount is evident in the different sectors, both compared to the US market and their long term averages, which offers numerous opportunities t investors with a fundamentally bottom-up approach.
