Analytics

 Investment Office

Selecting relevant market observations

Investment Thoughts
Macro Observations
Capital Markets
Markets in History
Beyond Finance
Quotes on the Fly
Chart Gallery
Academia
Coffee Chronicles
Archives
Asset Management
Pension Funds
Family Offices
Wealth Managers
Asset Managers
About
Disclaimer

   Investment Thoughts - Capital Markets

Quick Hit: Digging Into US and European Returns
A look at recent market returns on a geographical basis—and how sector weights may skew your view of them.


American stocks have outperformed most other developed markets in this bull market. It seems to us many US investors combine this fact with a bit of home-country bias to conclude US stocks are inherently superior to those outside America. But in our view, this misses a couple things. One, sector composition—namely America’s big Tech sector—accounts for virtually all the nation’s outperformance in recent years. Strip this out, and returns basically match. Two, even including Tech, there hasn’t been material US leadership for most of the last year.

 

Major geographic regions—like Europe and the US—tend to be diversified across sectors, but there can be significant differences in their weights. Case in point: In America, Tech and the newly formed Communication Services sectors—which includes three of four FANG stocks previously included in Tech[i]—combine for over 30% of S&P 500 market capitalization. The MSCI Europe Index, by contrast, has only about 10% in these Tech-heavy sectors.

 

 

Exhibit 1: America Is Tech-heavy

 

 

Source: FactSet, as of 6/21/2019.

 

Most of the performance difference between European and American markets is due to this discrepancy in Tech and Tech-like sector weights. As Exhibit 2 shows, while Europe (green line) outperformed the US (yellow) in 2017, US stocks surged ahead later—mostly between March and September 2018. But excluding Tech and FANG stocks—the dashed yellow line—America’s outperformance versus Europe effectively disappears.

 

 

Exhibit 2: US Outperformance—a Technological Illusion?

 

 

Source: FactSet, as of 6/21/2019. MSCI Europe Index return with net dividends, S&P 500 total return and S&P 500 excluding Information Technology and Facebook, Amazon, Netflix and Alphabet (née Google) total return, January 2017 – June 2019.

 

More recently, even if you include America’s Tech and Tech-like giants, there is no identifiable country leadership trend over most of the past year. As Exhibit 3 shows, while there are fluctuations in both directions, MSCI Europe’s relative return has essentially matched the S&P 500 since last September.

 

 

Exhibit 3: Europe Largely Keeping Pace With America Lately

 

 

Source: FactSet, as of 7/12/2019. MSCI Europe Index return with net dividends divided by S&P 500 total return, 12/31/2016 – 7/11/2019.

 

We continue to favor big Tech—and mega-cap growth stocks generally—but that shouldn’t preclude owning Europe, in our view. Today, many pundits think Europe’s economic future is exceedingly dour, suggesting tough times ahead for its markets. But in our view, Europe’s economic outlook remains fundamentally fine. The yawning gap between sentiment and reality—doom and gloom despite ongoing growth—is a key reason to be bullish on European stocks. This, plus a positive political backdrop, suggests to us the future for European markets is far brighter than most investors seem to appreciate.

 

H/T: Fisher Investments Research Analyst Timothy Schluter

 


 

[i] Facebook, Alphabet and Netflix are now in Communication Services, while Amazon remains in Consumer Discretionary.

 

Fisher Investments MarketMinder, 07/17/2019-Editorial Staff

20.07.2019


 

Themes

 

Asia

Bonds

Bubbles and Crashes

Business Cycles
Central Banks

China

Commodities
Contrarian

Corporates

Creative Destruction
Credit Crunch

Currencies

Current Account

Deflation
Depression 

Equity
Europe
Financial Crisis
Fiscal Policy

Germany

Gloom and Doom
Gold

Government Debt

Historical Patterns

Household Debt
Inflation

Interest Rates

Japan

Market Timing

Misperceptions

Monetary Policy
Oil
Panics
Permabears
PIIGS
Predictions

Productivity
Real Estate

Seasonality

Sovereign Bonds
Systemic Risk

Switzerland

Tail Risk

Technology

Tipping Point
Trade Balance

U.S.A.
Uncertainty

Valuations

Yield