Although Geopolitical risk has made European stocks less attractive, the strength of some European companies is not in doubt. Indeed many draw their earnings from outside the EU. This means the Russian invasion of Ukraine will not necessarily damage their profits. For many a foreign portfolio investment means investing in US stocks such as Tesla stock. Did you realise how many world class companies there are in smaller European stock markets?
Key Takeaways
Why you should consider European stocks
World class companies you may have forgotten about
The practicalities you will need to know
What are European stocks?
Within the investment community, European stocks are ones which are listed in continental Europe. The UK is excluded from this categorisation, not because of Brexit but because of currency. The UK’s pound sterling is not the same as European stocks Euro denominated listing currency. Yet here things get a little more complicated at this point.
Depending on who you speak to, European (continental) stocks only include Euro listed ones. Therefore Swiss or Danish listed companies do not count. Yet many consider them part of continental Europe. Indeed you will see many European focused portfolio managers including companies from both countries in their portfolios.
Why should you consider European stocks?
Firstly because if you are sterling-based investor, your a diversifying your risk. Not only are you buying a company in another country but you are also buying another currency. It is inherently possible that the European stock you buy trades sideways but the Euro appreciates by 20% against Sterling. You had not only made 20% but you have protected your wealth from Sterling’s fall.
Unfortunately for you, the reverse is also possible! Namely your investment goes up 20% but sterling appreciates against the Euro, wiping out your investment gain. Still investing in a worldwide-recognised currency does provide a margin of safety against having all your assets in Sterling.
Why are European stocks so interesting?
Most investors will have heard of French-listed LVMH and Germany’s BMW, but cast your eye on the list below and did you realise you could also invest in these household names?
Italy: Ferrari
Switzerland: Nestle, Richemont
Netherlands: ASML
Norway: Equinor
Denmark: AP Moeller Maersk
Although Ferrari, Nestle and Richemont (owner of Cartier) will need little instruction, the others are also major companies. ASML manufactures micro chips and is probably the most important company you have not heard about.
Equinor is a multi-national company which has been developing wind farms for some time. It has twice the market cap (at the time of writing) of the more famous BP. AP Moeller Maersk is one of the largest shipping companies in the world.
Practicalities
Not all brokers will allow you to buy European stocks. Large German and French listed companies are fairly easy to buy but some brokers will not allow you to buy Swiss, Danish or other smaller market stocks. It is worth checking a broker’s list of available stocks before committing to them.
You may also consider having one broker for your European stocks and one for your UK ones. Indeed some UK brokers such as interactive investorallow you to hold any dividends in that currency. This is particularly attractive for those looking to reinvest dividends or keep a certain currency exposure.
Furthermore, exchanging every dividend back into Sterling will cost you a fair bit. Most brokers will opportunistically charge you up to 1-2% for any foreign currency exchange. This is to be avoided at all cost.
How can you start?
Research the constituents of all the European stock markets of note. This should include the Scandinavian countries and the southern European ones.
You will quickly see names you had maybe not thought of such as H&M listed in Sweden. Keep an open mind, some famous names, such as Zara, are listed under the group they belong to: Inditex (listed in Spain).
Once you seen a company of interest, check their annual statement. Many of these will be in English so there is no excuse not to have a look for any creative accounting.
The risk with European stocks
Firstly you should be aware of the currency risk. In 2015 in what was called the Frankshock, CHF suddenly appreciated 20% against the Euro. Some foreign currency brokers actually went bankrupt as a result.
This means your investment could theoretically be up 20% but because the currency has moved against you by 20%, you are only break even. Theoretically if the currency really moved you could end up actually loosing money.
Foreign markets make close at different times. For example the Swiss stock market closes at 4pm UK time. This can catch out UK-based investors who are used to the 4.30pm UK stock market closure. You will also need to stay aware of clock changes from summer to winter time and vice-versa. On top of this, you will have to learn bank holidays which will be different from the UK’s.
The future opportunities
The expansion of the EU has meant opportunities to new economies and their companies. Anyone travelling to Warsaw or Krakow cannot fail to notice the shinny brand new terminals. This investment in infrastructure bodes well, as it creates jobs (Revolut have an expanding base in Krakow) and in return wealth.
This wealth means increased spending which means consumerism sets in. Although recent geopolitical events around Ukraine will affect the Polish spending, longer-term Polish economic growth should be positive.
Conclusion
There are definite opportunities for investing in European stocks, not least the diversification of your risk. Having a healthy balance of Euros is also protects against Sterlingdownside risk.
With the wealth of information available online today, European stocks are reachable for all investors. Indeed as many of us use the products produced by these companies, we can judge for ourselves if they are worth it.
This should give the confidence to look at the annual report so as to check that the company is generate enough cash to pay for its operations. Remember fundamental analysis is an investors best friend.
Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.
Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.
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