Market Comment July 2021 Summer Reflections, Europe Mon Amour?
With temperatures rising and lockdowns being gradually lifted throughout the continent it is now all about soccer and summer vacation, supposedly the top priorities of Europeans, or so Americans like to tell us. That may well be a prejudice, but every generalization has a grain of truth to it. If I turn to my investment portfolios, I realize that there is a strong bias towards US equities. Now, why does a financial advisor located in the heart of Europe not succumb to the home-bias and instead recommends investments in the US financial markets? Outside of the known statistics showing that the US financial system has by far the largest, most liquid, and dynamic market, the simple answer is: European companies have fallen behind.
Plenty of European companies still warm consumers’ hearts. LVMH of France sells Louis Vuitton handbags from Paris to Beijing; German cars and Swiss pharmaceuticals are eagerly picked up around the world; and homes are filled with products made by Unilever, an Anglo-Dutch giant and IKEA, a Swedish furniture-maker. But look at who dominates the global corporate economy, and Europe’s geopolitical rivals prevail.
You might have expected a global chain of cafés to emerge from Italy, the home of espresso and baristas. Instead, despite the US’ reputation for insipid coffee, Starbucks has shown the world how to appreciate coffee. Being at the forefront of environmental regulation, and with a proud engineering tradition, you would have expected a green car giant to emerge from Europe. Instead, it is a US newcomer, Tesla, that has upended the automobile industry and is now worth roughly as much as all US and European carmakers combined. UK or Swiss financiers could have created an asset-management giant to dominate the markets: today it is BlackRock, set up in 1988, which manages USD 9trn of global investments from New York.
There are several reasons why European companies have fallen behind their US competitors. The first reason is that its firms seem to have been outmanaged. Look at firms competing in the same sector over the past 20 years, and incumbent US companies often went on to churn out bigger profits and are better positioned for future success than their European counterparts.
There are many exceptions to this rule, of course: Siemens of Germany has outshone its industrial rival General Electric, and Airbus, based in France, has had fewer problems building jets than Boeing, its US rival. But by and large it has been better to bet on Nike of America over Adidas of Germany; JPMorgan Chase in New York over Credit Suisse in Zurich, or America’s Walmart over France’s Carrefour. Their advantage in terms of profits and sales growth is often small, but compounds over time. See this remarkable table below:
A second reason Europe fell behind in recent decades is that its biggest firms are in the wrong industries. The sectors European firms dominated 20 years ago, such as insurance or telecoms, have grown at a glacial pace. Even if European firms did well, as many did, they mattered less as the world moved on. The US, by contrast, had already made significant inroads into software and e-commerce, industries that would soon redefine the global economy and generate trillion-dollar valuations.
The third, and most striking, reason Europe has fallen behind is the lack of newly created firms in its blue-chip indices. Many of the biggest companies in the US, such as Amazon, Netflix, Tesla, or Facebook, are young enough to be run by their founders. In Europe old names prevail.
Of the world’s 142 listed firms worth over USD 100 bn, 43 were set up from scratch in the past fifty years, 27 in America and ten in China. Only one was in Europe: SAP, a German software group founded in 1972. Half of Europe’s richest ten billionaires inherited fortunes built long ago; in the US nine of the top ten are wealthy solely because of companies they founded.
If you now think “I wish I had invested in Amazon twenty years ago or Netflix fifteen years ago. But I did not. Now what?" It is not an uncommon refrain among investors. For everyone who missed Amazon, or Costco, or even Square, did you know it was possible to wind back the clock? Not in the actual sense of turning back time to 2014 (or earlier!) but by looking outside the US for companies doing very much the same thing in their own respective countries? It is true: Shopify is Canadian, Atlassian from Australia, Sea Ltd is based in Singapore. Commercial trends that have taken place in the U.S. sometimes get repeated in less mature markets much later. Finding companies in global markets that are poised to take advantage of the same changes in their home countries that have already taken place here is a fantastic way to gain exposure to things in your portfolio that have already happened in the US.
We are happy to make our money in the US and enjoy our vacation anywhere if Covid will let us. We can enjoy our soccer championship and our beloved vacations.
Switzerland, July 1st, 2021