European equities have suddenly become popular for various reasons.
First, political risk in the region has mitigated. Second, economic numbers are improving, particularly those of Germany.
Third, low valuations have made those markets attractive.
With lots of investors overly exposed to US equities, it’s not a bad idea for them to diversify into European stocks.
As for me, there’s another reason why I have been adding to my European stock portfolio lately: M&A possibilities.
China firms are always on the lookout for opportunities to acquire companies with strong technology and brand value.
Given the milder resistance in Europe for such deals, compared to the US, the possibilities of seeing mega deals is higher in Europe, which often drives up the overall market.
That said, I must point out one thing.
Though bullish in the near term, I’m still skeptical whether the European market can ever replicate the boom of US stocks.
Which is why I have been focusing on short-term trading using index funds and been very selective when it comes to buying stocks for long-term investment.
As a matter of fact, European equities have several weak points.
European markets lack leading tech giants, unlike the situation in the US.
Without such tech giants pulling the market along, it’s hard to sustain a steady uptrend.
Auto industry is a sector in Europe that I am quite worried about.
Over the long run, the firms are going to face stiff challenge from newcomers like Tesla and Apple.
The current share price of BMW is 25 percent below the peak level seen in early 2015, lagging far behind the market. That tells you something about the potential threat stock prices are pricing in.
European banks are also weaker than their US counterparts, which have emerged fully from the 2008 financial crisis. Most European players are not in a strong position to invest for the future.
With fintech evolving at a rapid pace, can European banks handle any disruptive changes technology may bring? I have my doubts.
European firms have great advantage in terms of brands and craftsmanship. So it’s not surprising to see the luxury sector outperform. However, we should bear in mind that luxury is not something that can be mass produced. Thus, there are inherent limitations when you talk of growth prospects.
This article appeared in the Hong Kong Economic Journal on May 16
Translation by Julie Zhu
[Chinese version 中文版]
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