I want to invest in Europe's comeback. Where do I start?
There is no doubt that US equities have dominated the global market for much of the past decade. The majority of 'big tech' companies are listed in the US, and their exponential growth has helped the market to significantly outperform its peers. As a result US equities now account for about 72 per cent of the MSCI World index, which is a widely accepted global benchmark.
If someone in the UK had invested in the MSCI USA index ten years ago, they would, by now, have made a pound sterling return of 305 per cent (including dividends). If they had invested in the MSCI Europe index, the return would have been 131 per cent.
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More recently, however, investors have shown more interest in long-neglected European equities. Since the start of the year the MSCI Europe index has gained about 13 per cent when measured in sterling, whereas the MSCI USA index has lost about 3 per cent. It's worth noting that currency movements have had an impact on these numbers — the euro has strengthened this year, whereas the dollar has weakened.
So what's behind this European resurgence? One reason is certainly the political uncertainty in the US.
President Trump's tariffs and his One Big Beautiful Bill Act have spooked many investors who have looked for opportunities elsewhere, resulting in a flow of capital out of the US and into Europe. And Trump's public criticism of the EU has arguably spurred the bloc to take more responsibility for its own growth.
Nato is a good example here. Nato members should be spending 2 per cent of their GDP on defence, but most European member countries have fallen far short of this target over the past decade, whereas the US has significantly exceeded it. The war in Ukraine, coupled with Trump's threats to pull the US out of Nato, has led to a significant rise in defence spending across Europe, and Nato members have just agreed a new spending target of 5 per cent of GDP.
Economic theory tells us that effective government spending should help economic growth. The German government has strict rules to limit its level of debt, known as the debt brake, and this has capped its spending and arguably limited growth. Germany's national debt is low compared with other countries, at 62 per cent of GDP at the end of last year. The figure for the UK is 96 per cent and for the US it is 124 per cent.
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Germany's low debt means that investors are comfortable lending money to the country, meaning it can borrow at low rates of interest. But there have long been calls for Germany to spend more and in March, the German government said it would be relaxing the debt brake and spending more on defence and infrastructure.
For those wanting to invest in German stocks, there are several attractive international companies listed on the Frankfurt exchange. SAP is one of the few large European technology companies and is a global leader in enterprise software; Siemens is modernising the industrial sector with its focus on automation and digitalisation; and E.on is one of the world's largest utility companies.
As the largest economy in Europe, Germany will typically have a sizeable weighting in European equity funds. The growth-oriented BlackRock European Dynamic fund, for example, has 20 per cent invested in Germany. The JP Morgan European Growth and Income trust, which places more onus on dividends, has a higher weighting of 22 per cent.
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But while it's tempting to be swayed by recent stellar performances in any market, it is never wise to pile into one economy or company — or even continent. Europe could well make a strong addition to your portfolio, but never forget that diversification is the golden rule of investing.
Rachel Winter is a chartered wealth manager and partner in the investment management team at Killik & Co
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