It’s often said markets will move in a manner that confounds the greatest number of investors, and that is what is happening in 2023. U.S. stocks are off to a good start in 2023, with the S & P 500 up 7%, but Europe is just killing it. All the major European ETFs are up 15%-20% for the year and were at new highs last week. European ETFs (year to date) SPDR Euro Stox 50 (FEZ) up 20% iShares MSCI Eurozone ETF (EZU) up 18% JPMorgan BetaBuilders Europe ETF (BBEU) up 15% Vanguard FTSE Europe ETF (VGK) up 14% Part of the move can be explained by a surge in luxury stocks due to the China reopening story, a prime market for luxury. Whether it’s luxury auto, clothing, or high-end champagne, luxury is having a moment. European luxury this year Rolls Royce up 71% Hermes up 44% LVMH up 38% Kering up 26% Richemont up 30% BMW up 24% Pernod Ricard up 21% Many of these luxury good companies are headquartered in France. It’s true France is having a good year, but so is the rest of Europe. All the major European country ETFS were at 52-week highs last week. European ETFs: New highs (year to date) Ireland (EIRL) up 23.6% France (EWQ) up 19.9% Spain (EWP) up 19.7% Germany (EWG) up 18.3% Italy (EWI) up 17.6% United Kingdom (EWU) up 10.2% So it’s not just luxury moving, the broader European market has been rallying. From makeup to sneakers to steel to pharmaceuticals and software to cars for the masses, Europe is outperforming. European stocks this year L’Oreal up 38% Adidas up 33% Thyssenkrup up 32% Bayer up 30% SAP up 29% Stellantis up 25% There’s are several other reasons Europe is outperforming. 1. Relative valuations for Europe vs. the U.S. are very attractive. Europe has become a hunting ground for value players. On almost any valuation metric (Price/book, price/earnings, price/sales) Europe is a bargain. For example, the multiple (P/E ratio) on the EuroStoxx 50, a basket of 50 of the largest stocks in Europe, is 14.28, compared to the S & P 500 P/E of 18.8, according to State Street. That is historically a very low P/E ratio for Europe, in the 4th percentile (low) relative to the STOXX Europe 600 over the last 15 years. Compare that to the U.S.: That 18.8 multiple is in the upper 93rd percentile over the last 15 years. 2) Earnings. I already noted the strong sales to China. The initial shocks of the war in Ukraine that led to an energy crisis in Europe have dissipated, partly because it was a relatively warm winter, and the aftershocks of the war in general are starting to lessen. The result: The U.S. has seen earnings estimates downgraded for the next couple quarters, but upgraded in Europe. 3. Monetary policy is less restrictive than in the U.S. Because the Fed has been so aggressive , the dollar has weakened, which has provided a tailwind for Europe. 4. Europe has underperformed the U.S. for the past 10 years. For example, the S & P 500 is up 261% in the past 10 years; the STOXX Europe 600, a similar basket of the 600 largest stocks in Europe, is up 158%, a little more than half the gain of the S & P. The key takeaway: “Europe has better and more conducive relative valuations,” Matt Bartolini, head of SPDR Americas Research for State Street, which oversees one of the largest European ETFs, SPDR Euro Stox 50 (FEZ), tells me. Bartolini, head of SPDR Americas Research for State Street, and Vance Barse, founder, Your Dedicated Fiduciary, will be on ETF Edge on Monday at 1:10 p.m. ET to discuss investing in Europe. ETFEdge.cnbc.com .
