Money Is Returning to European Stock Markets
Lately, investors have been looking eagerly at Europe again. Despite the negative headlines from Brexit last year, the data has been better out of Europe and GDP growth in the region has even turned positive! With US equities at high valuations, investors have finally begun to turn their eyes to international markets, and Europe is looking like a great bounce back candidate.
European Currencies Are Bottoming
The currency risk in the region has also abated lately. Despite the fact that the US’ Fed is the most aggressive central bank in the world right now in terms of actual hikes, the ECB’s Draghi has been more hawkish of late and there is talk of the end to easy money (tapering), even if they do not hike this year. This is positive for the Euro, which has been pummeled over the past 3 years, dropping almost 24% from the highs in March 2014 on a number of dramas and constant talk of a European break-up. Non-euro European currencies have not been exempt either – the British pound has dropped almost 27% since peaking in 2014 helped along by Brexit.
How Have European Markets Performed Since 2007?
With this backdrop for building the case of a bullish run in European markets, we wanted to look at how stock markets in the region have fared since reaching highs in 2007. Every market was crushed during the financial crisis in 2008 and subsequent Euro-centric crises since then, but their performance since then have been much more varied.
We wanted to identify bounce-back candidates as markets which still have a long way to bounce back to previous highs achieved in 2007, but may finally have reached turning points with the positive sentiment across the whole region.
So which markets have suffered the most, and are the farthest from their glory days of 2007?
The Biggest Bounce-back Candidates In Europe:
Leading the way is Cyprus, which is down almost 99% from its peak in October 2007. It is perpetually touted as a potential breakout candidate, and we wrote about it in 2014 in this light. It hasn’t worked yet, but now that the whole region is turning, perhaps the timing is finally right. For those interested, we have a guide to investing in Cyprus.
Bosnia, and Cyprus’ neighbour, Greece, are not far behind. Iceland, where more bankers have been jailed post the financial crisis than the rest of Europe, comes in 4th on the list. It is staggering that the stock markets in Europe are still down an average of 35% since hitting the highs in 2007. The best performing market, Latvia, is only flat since then and would have lost on the currency.
Contrast that to the US, where the S&P 500 is actually up over 48% from its highs in 2007. When you take into consideration that the USD has also appreciated by roughly 20% against the Euro in the past 10 years, its no wonder that investors have piled into the US and been underweight Europe for so long.
This under-performance is the key to understanding why people are looking at Europe now. The worst seems to have passed, plus with valuations and relative performance over the past 10 years, Europe has lagged massively.
The Best Bottom-Buying Trades In Europe
On the flipside, how would an investor had done if they had managed to buy the bottom in a market amidst all the panic?
“The best time to buy is when everyone else is running for the exits”. The gains in the chart above are the reason there will always be some bottom-buying interest in distressed markets. “% Off Low” calculates how much an investor would have made if they had bought the absolute bottom in the market.
For reference, the S&P 500 is up about 245% since hitting the bottom in 2009. Despite the S&P crushing all of Europe in the previous metric, 9 different European countries have beaten it in terms of bouncing back from the lows. It shows you how badly Europe suffered at the height of the crisis.
Estonia leads the way, with a 357% gain since bottoming out in March 2009, with Denmark and Romania both over 300% as well.
Unsurprisingly, two of the biggest losers from the previous chart, Bosnia and Cyprus, have also bounced back the least. They only hit their 10 year lows in the past 4 months. An optimist would take that as an opportunity to get in at the beginning of the turnaround. A pessimist would see it as markets which are still bottoming out.
The performance of Greece has to be heartening though, since it has rallied 55% from the lows of February 2016 and seems to finally be on the right track. Just another 87% to go!
Unlike the US, European stock markets are still down massively since the highs of 2007. With sentiment shifting, low valuations, and a long way to go in terms of making up ground on previous highs, it is worth looking at Europe again for most investors.