European Equities: A Smart Investment Choice

Investing in European equities can be a great way to diversify your portfolio. While the US market is currently dominant, with US companies making up 71.8% of the MSCI World Index, investing in European stocks can offer exposure to other areas of the market where Europe has parity or the upper hand, such as the automotive, luxury goods, and pharmaceutical sectors.

European stocks are also considered to be more attractively priced compared to US stocks, with a lower price-to-earnings ratio. This could make them a good investment, particularly if you believe that Europe's companies are due a fightback after being outperformed by US equities over multiple timeframes.

Additionally, European companies are increasingly globalising their earnings, with around 60% of their earnings coming from outside Europe. This means that investors in European equities can also benefit from major international initiatives and economic growth in other regions, such as the US Inflation Reduction Act and the rise of the Asian middle class.

However, there are also risks to consider when investing in European equities. Europe's working-age population is in decline, which could hamper economic growth and company earnings. There are also demographic challenges, with an ageing population and a low birth rate. Europe also lags behind the US in terms of tech innovation, with no European companies featuring in the top 10 tech companies by market capitalisation.

European stocks are cheaper than US stocks

European stocks are much cheaper than US stocks on most metrics, including price-to-book and price-to-earnings. This is largely because the MSCI Europe Index has higher weightings in lower-multiple sectors such as energy and financials, while the US's S&P 500 Index has larger weightings in the higher-multiple technology sector. Technology companies generally grow profits faster, and as earnings are what drive share prices, it makes sense that investors will be willing to pay more for faster-growing profits.

However, it's important to note that the majority of industry groups are similarly valued in both regions, and some European industry groups are more expensive than their US counterparts. Additionally, the difference in industry group weights drives much of the difference at the aggregate index level. When this is normalised by applying S&P 500 industry group weights to the MSCI Europe Index, the valuation spread between the two regions is halved.

Despite US equities outpacing their European peers in the past 15 years, there are still reasons to invest in European equities. Firstly, selectivity is key in both markets. While US equity valuations are considered quite expensive, better value can be found in other regions, such as Europe. Additionally, investing in European equities can provide diversification and exposure to one's own currency, which may be more tax-efficient depending on local tax laws.

Europe's ageing population

Impact on Economic Growth and Labour Market

The ageing population in Europe is expected to have a notable impact on economic growth. A decrease in the working-age population can lead to a decline in potential output and labour productivity, potentially slowing down economic development. This can be attributed to the simple economic model where economic output is dependent on factors such as capital and labour. With a declining working-age population, there are fewer individuals contributing to the labour force, which can hinder economic growth.

Healthcare and Social Welfare

The ageing population will also place a significant burden on healthcare systems and social welfare programmes. As people age, they become more susceptible to chronic diseases and age-related conditions, increasing healthcare costs. Additionally, social welfare systems, including pensions and long-term care services, will come under strain as the number of older individuals relying on these services increases.

Strategies to Mitigate the Impact

To address the challenges posed by Europe's ageing population, short-term, medium-term, and long-term strategies are necessary. In the short term, the focus should be on preserving the health and productivity of older individuals by providing specialised healthcare services and accessible treatments for age-related issues. In the medium term, creating senior-friendly living environments, similar to the initiatives in Vienna, can help older individuals maintain their independence and actively participate in their communities.

Migration and Fertility Rates

In the long term, addressing declining fertility rates and encouraging migration can help mitigate the impact of an ageing population. Strategies such as childcare support, paternal leave incentives, and flexible work schedules have shown positive effects on fertility rates. Additionally, many European countries will increasingly rely on immigration to balance their demographic imbalances. Therefore, investing in migrant health and creating comprehensive approaches to support migrants' wellbeing throughout their journey will be crucial.

Investment Opportunities

While Europe's ageing population presents societal and economic challenges, it also creates investment opportunities in certain sectors. For instance, the demand for crematoriums and funeral services is increasing due to rising death rates. Private equity firms are investing significantly in these sectors, recognising the potential for financial gains.

European companies are beneficiaries of global growth

Europe's large companies have been diversifying their activities and revenues globally in recent decades. As a result, the revenue exposure of European companies to developed Europe has reached a 30-year low, with only 38% of revenues generated in the region.

For example, European companies have a strong presence in China, despite the challenges posed by the country's slowing economic growth and overcapacity pressures. While European companies face competition and regulatory hurdles in China, they continue to invest and expand their operations, recognising the market's potential.

Additionally, European companies are well-positioned in the automotive and electric vehicle sectors, with Volkswagen and other European carmakers gaining traction in the Chinese market.

Moreover, European companies have established themselves in sectors such as aeronautics and defence, agricultural commodities, auto and truck parts, environmental services, and the pharmaceutical industry.

The diversification of European companies' activities and revenues globally positions them to benefit from growth opportunities in various markets and sectors. Their presence outside of Europe contributes to their overall growth and performance, making them attractive investment options.

Europe's GRANOLAs

European equities are also attractive because of their:

• Broad range of leading companies with strong global franchises
• Lower stock concentration risk at the index level
• Improved diversification at the sector level
• Global earnings footprint
• Attractive valuations

European companies have been diversifying their activities and revenues across the globe in recent decades. Around 60% of their earnings now come from outside Europe, with the US, Canada and Asia (excluding Japan) being the main drivers over the last 15 years or so.

European companies are now less dependent on the performance of their domestic economies and have truly global earnings exposure. For example, German-based software company SAP's performance is not dependent on the German market, but on how its global software business is performing.

European stocks are also considered a good investment because of their relatively cheap valuations compared to US stocks. The price-to-earnings ratio for European stocks is about 13 times, whereas the S&P 500 is at an average price-to-earnings ratio of 28 times.

However, it is important to note that European equities could be characterised as a riskier investment compared to US equities, with slower economic growth, demographic challenges and a lack of big tech successes.

Europe's top pharmaceutical companies

Europe is home to some of the world's most advanced pharmaceutical companies, which compete with the US in terms of technological advancements. The European pharmaceutical industry was valued at $283 billion in 2020 and is expected to grow at a CAGR of 5.4% until 2028, reaching $432 billion. This growth will help the industry recover from the effects of the COVID-19 pandemic, which caused a decrease in diagnoses and prescription medicine uptake.

Novo Nordisk AS

Denmark-based Novo Nordisk AS is the leading pharmaceutical company in Europe by market capitalization as of March 31, 2023. The company's portfolio includes pre-filled delivery systems for insulin, glucagon hypokit, cartridge needles, vials, insulin, estradiol for hormone replacement, recombinant drugs for hemophilia, glucagon, and oral antidiabetic agents. Novo Nordisk reported revenues of $25,014 million for the fiscal year ended December 2022 (FY2022), an increase of 25.7% over FY2021. The company employs 54,393 people.

F. Hoffmann-La Roche Ltd

Swiss-based F. Hoffmann-La Roche Ltd is Europe's second-largest pharmaceutical company by market capitalization as of March 31, 2023. The company reported revenues of $66,291 million for FY2022, an increase of 0.8% over the previous year. The company offers in vitro diagnostics, tissue-based cancer diagnostics, and diabetes management solutions. It employs 103,613 people.

AstraZeneca Plc

AstraZeneca Plc is one of the largest pharmaceutical companies in Europe, with a market capitalization of $215,560 million as of March 31, 2023.

Novartis AG

Novartis AG is one of the top pharmaceutical companies in Europe, ranked third by market capitalization in September 2024.

Sanofi

Sanofi is a top European pharmaceutical company with a market capitalization of $136,991 million as of March 31, 2023, the lowest of the top 5 companies.

Jazz Pharmaceuticals plc

Jazz Pharmaceuticals is an Irish company headquartered in Dublin, Ireland. It develops treatments for sleep disorders, cancers, leukemia, and tumors. Jazz Pharmaceuticals had a market capitalization of $9.27 billion as of November 22, 2022. The company aims to generate $5 billion in revenue by 2025 and secure at least 5 product approvals by the end of the decade.

Vifor Pharma AG

Vifor Pharma is a Swiss pharmaceutical company based in Sankt Gallen, Switzerland. It develops treatments for iron deficiency, heart patients, and rare renal diseases. The company reported revenue of 1.1 billion CHF in FY2021, with a net sales growth of 2.8% and an improved gross profit margin of 63.2%. Vifor Pharma's latest market capitalization was $11.6 billion as of November 22, 2022.

Horizon Therapeutics Public Limited Company

Horizon Therapeutics is a German pharmaceutical company that develops treatments for autoimmune and inflammation-related diseases. The company beat analyst revenue and EPS estimates during its third fiscal quarter, reporting $924 million in revenue. Horizon Therapeutics has a market capitalization of $17.4 billion as of November 22, 2022.

Royalty Pharma plc

Royalty Pharma is a British firm headquartered in New York that buys royalties and funds drug development in the United States. Despite the challenges in the healthcare sector, Royalty Pharma's shares have performed well, with a 3.56% increase over the year. The company's market capitalization is $19.2 billion as of November 22, 2022.

Argenx SE

Argenx SE is a Dutch company headquartered in Breda, the Netherlands. It develops treatments for polyneuropathy, hematological cancer, airway inflammation, and other autoimmune diseases. argenx SE generated $147 million in revenue during its third fiscal quarter, beating Wall Street estimates. The company's shares have been performing strongly, with a year-to-date gain of 5.9%. argenx SE has a market capitalization of $20.7 billion as of November 22, 2022.

Genmab A/S

Genmab A/S is a Danish company based in Copenhagen, Denmark. Its treatments target multiple sclerosis, leukemia, myeloma, solid tumors, and atrophy diseases. Genmab's Darzalex drug, in partnership with J&J, generated $6 billion in sales last year and is estimated to bring in up to $8 billion in sales this year. The company has a market capitalization of $28.7 billion as of November 22, 2022.

Lonza Group AG

Lonza Group is a Swiss equipment firm headquartered in Basel, Switzerland. It provides products and services for biopharmaceutical development, enabling biopharmaceutical and small molecule drug manufacturing. Lonza Group's four business segments have performed well, with sales growth in its Biologics, Small Molecules, Cell & Gene, and Capsule and Health Ingredients segments. The company has a market capitalization of $38 billion as of November 22, 2022.

BioNTech SE

BioNTech SE is a German biotechnology company based in Mainz, Germany. It develops treatments for melanoma, prostate cancer, breast cancer, ovarian cancer, lung cancer, and other diseases. BioNTech is known for its coronavirus vaccine, developed in partnership with Pfizer, which has continued to evolve with new variants. BioNTech has a market capitalization of $38.5 billion as of November 22, 2022.

Bayer Aktiengesellschaft

Bayer Aktiengesellschaft is a German pharmaceutical giant and one of the oldest companies in the world, established in 1863. It is headquartered in Leverkusen, Germany. Bayer's management has strong growth estimates for the company, expecting to grow pharmaceutical sales between 3% and 5% until the end of 2023. The company delivered 18% annual revenue growth during its second fiscal quarter. Bayer has a market capitalization of $54.8 billion.

GSK plc

GSK plc is a British biotechnology and pharmaceutical firm that enables the development of treatments for HIV, cancer, nervous system disorders, and other diseases. GSK raised its

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