European equities: returns where hardly anyone is looking?

For some years now, one particular part of the stock market has been attracting attention: the stock market superstars from the USA, the so-called big tech stocks. Not least due to the hype surrounding artificial intelligence (AI), these stocks are the talk of the town. Other stock markets, such as the European market, tend to fall behind. However, European shares can still play an important role in your own portfolio.

European equities benefit from global economic growth

The European economy has not grown nearly as strongly as the US economy in recent years. However, this does not necessarily mean that companies based in Europe have a growth problem. On the contrary, the European economy is largely export-oriented. Companies in the MSCI Europe Index, for example, which tracks Europe's largest companies by market capitalization, generate more than half of their sales outside the European industrialized nations¹. So when the global economy grows, this also benefits many companies in Europe.

So much for the real economy. But what about the performance of European equities, their return potential and the question of what role they could play in a well-diversified portfolio?

On the stock market, yesterday's losers can become tomorrow's winners - and vice versa. This could be observed, for example, in the period between the bursting of the dotcom bubble in 2000 and the major financial crisis of 2007 to 2008. During this period, European equities outperformed the US stock market for several years. This can be seen by comparing the MSCI Europe with the MSCI USA - both indices track the largest listed companies by market capitalization in each region². Anyone who took this as an opportunity to reduce their exposure to the broad US equity market missed out on the subsequent rally in US equities³, which continues to this day, or only partially benefited from it. Investors should therefore keep reminding themselves how important it is to spread risks and diversify their capital across different asset classes, regions and sectors. In the long term, it generally pays off not to make too big a bet and to stick to a chosen strategy even during periods of weakness.

The euro crisis' problem areas are among the winners today

What applies on a large scale can also be observed on a small scale. At the time of the euro crisis, highly indebted countries facing economic challenges such as Italy, Spain and Greece were seen as the problem children⁴ among the countries that use the euro as their national currency. This was also reflected in the low valuations of the stock markets in southern Europe. The tide has now turned. The so-called peripheral countries of the eurozone are now attracting positive attention. If you look at the returns of the regional share indices, countries such as Italy, Greece and Spain have been among the winners within Europe in recent years⁵. Diversification is the be-all and end-all here too. Anyone who turned their back on former crisis states in the eurozone out of concern at the time had to forgo one or two points in returns.

Be careful when choosing an index

If you want to track the entire European equity market in a diversified manner with an ETF, there are various indices to choose from. For example, there are indices that specifically track companies in the eurozone. ETFs on the Euro STOXX 50 Index⁶ include the largest companies in the eurozone in terms of market capitalization, whereby shares from Switzerland, Norway or the United Kingdom are excluded. ETFs whose underlying indices include companies from all European industrialized countries are available to reflect the entire European market. Examples of this are the MSCI Europe⁷ and the STOXX Europe 600⁸.

Product risks of the ETFs mentioned with a focus on Europe:

• The value of an equity investment depends on a number of factors, including market conditions, current economic situation, sector, geographical region and political events.
• The funds are not capital protected. The value of your investment may go down as well as up. Past performance is not a reliable indicator of future performance.
• The funds are exposed to movements in the equity markets in a single country or region, which may be adversely affected by political or economic developments, government actions or natural events that would not affect a broadly diversified fund.

• ¹ Source: Global Strategy: Global Exposure Guide 2024
• ² Source: Bloomberg, comparison between MSCI Europe Net Total Return Index and MSCI USA Net Total Return Index, performance in euros. DWS (own calculations).
• ³ The MSCI USA Index is an example of the broad US equity market.
• ⁴ Source: https://www.bpb.de/kurz-knapp/lexika/das-europalexikon/176846/eurokrise/
• ⁵ Source: https://www.justetf.com/de/market-overview/die-besten-laender-etfs-3-jahre.html
• ⁶ The EURO STOXX 50 is a share index made up of 50 large, listed companies in the eurozone.
• ⁷ The MSCI Europe Index is an equity index that tracks the performance of over 400 companies from European industrialized countries.
• ⁸ The STOXX Europe 600 or STOXX 600 is an equity index of the 600 largest European companies.