Europe’s lack of ‘cool’ stocks dooms race against Wall Street

People holding mobile phones are silhouetted against a backdrop projected with the Twitter logo in this illustration picture taken in Warsaw September 27, 2013. (Reuters pic)

MOSCOW: European stocks just can’t catch up with the US The main reason: Most of investors’ favourite millennial tech stocks are listed on Wall Street.

With the likes of Twitter Inc. and Netflix Inc. up more than 80% this year, New York’s outperformance of Europe in 2018 is easily explained. It’s also hard to change.

“It’s the cool tech stocks that Europe is lacking,” said Max Kettner, a cross-asset strategist at Commerzbank AG in London. “It’s tough to see Europe outperforming the US.”

A look at the performance of the regions’ main equity benchmarks shows what a difference the imbalance makes. While the S&P 500 is up about 2% this year, the Stoxx Europe 600 is down more than 2%. But if you exclude tech and telecom services shares from the S&P 500, the gap shrinks significantly, with the US gauge falling 0.9%.

And even though European tech stocks are one of the region’s best-performing sectors this year, their share in the Stoxx Europe 600 is a meagre 4.7%, compared with 26% in the S&P 500.

Euro Isn’t Helping
Of course, there are other reasons why Europe remains a laggard. Earnings growth in the region trails the US at a time when political volatility in Spain, Italy and Germany is keeping investors on their toes.

When the euro began its slide in April, some analysts, including those at Legal & General Investment Management Ltd., had hoped this could spur outperformance by European equities due to support for exporters. According to Commerzbank’s Kettner, this theory fell down because investors instead focused on the negative reasons behind the euro’s weakness, such as the threat of US tariffs.

The comparison between the two benchmarks is also not in Europe’s favour on a longer-term horizon, with the S&P 500 up about 120% over the past 10 years and the Stoxx 600 gaining 34%. European profit growth is seen at 6.1% this year and 8.6% in 2019 compared with 23% for the US companies in 2018 and 11% next year.

“If we take tech out of both indices, then the gap is smaller; indeed a useful exercise is to sector-weight the two indices equally and then the comparison is fairer,” Andrew Milligan, head of global strategy at Aberdeen Standard Investments, said by email. “However we have to accept the fact that US earnings growth is much stronger than European, not just due to tech.”

The S&P 500 Index dropped 0.5% on Tuesday led by technology shares after a Chinese court temporarily banned Micron Technology Inc. chip sales in the country. Tech stocks also were the biggest decliner among European sectors on Wednesday — losing 0.8%.