Europe: Old Continent with New Ideas

The continent of Europe is home to more than 40 countries. Many European countries are part of the European Union (EU), the European economic area (EEA), or the single market. The European Union came into being with the Maastricht Treaty of 1993, and the single currency of the Euro was adopted in 2002. The monetary union, or Eurozone, where all the members use the Euro, comprises 19 countries, with the European Union now consisting of 27 countries. The EEA includes the European Union countries, and Iceland, Liechtenstein, and Norway. Switzerland is neither part of the EU or the EEA but is part of the single market.

Historically, Europe has been an area of frequent military activity. France and Germany alone have been involved in nine different wars with each other, between 1700 to 1945. The establishment of the EU has avoided military conflict in the region while increasing the region's economic strength. The EU GDP stood at $15.17 trillion in 2020, making it the second-largest economy after the USA. Manu European countries score high in the human development index, a measure of the quality of life.

Here are the top European countries by GDP.

The businesses in Europe are as varied as the cultures 

UK

The United Kingdom’s capital London is one of the leading financial centers of the world. London is the number one market in foreign exchange trading, handling about 43% of the transaction volumes. More than 2,600 companies are listed in the UK exchanges. The country is home to large international banks, technology companies, top industrial and mining companies, multinational consumer goods companies, and healthcare companies.

Some of the companies listed in the UK, which also offer ADRs on US exchanges, include:

HSBC is the second largest bank in Europe and has a presence in 65 countries. It has a significant presence in the Far East.

Prudential PLC is one of the largest financial services firms in the world with insurance and asset management businesses.

Diageo is a prominent alcohol and beverages company with operations in over 180 countries. It owns some top brands such as Johnnie Walker, Oban, Caol Ila, Crown Royal, Captain Morgan, Smirnoff, Gordon’s, and Guinness.

WPP is a top public relations and advertising firm and owns agencies such as Grey, Ogilvy, and consulting company Kantar.

Manchester United Plc is the holding company that owns and operates one of the top professional football clubs in the world.

In addition to its homegrown companies, the UK is also a preferred destination for listing of foreign firms. Many of these companies’ trade as ADRs in the US.

BHP is one of the largest mining companies globally, interested in iron ore, copper, oil & gas, and other minerals.

Rio Tinto is an equally big mining company with mines worldwide and exposure to a variety of metals and minerals.

Germany:

Germany is the industrial powerhouse of Europe. Some of the top automobile companies have their bases in Germany, supported by its vast small and medium businesses system. Some of the top German companies include,

Deutsche Bank is a multinational financial services company and investment bank with a presence in over 50 countries.

BioNTech is a biotechnology company most famous for its recent development of the mRNA vaccine for the Covid19 virus.

SAP is a multinational technology company and is renowned for its ERP software. It is the largest non-American software company by revenues.

France:

France is also home to many banks, industrial companies, and consumer goods companies. The country has specially created a niche in the luxury goods industry, with Kering, LVMH, Christian Dior, and Hermes making their home in France.

Switzerland:

Switzerland is home to leading private banks and healthcare companies. A few examples include:

UBS is the largest Swiss banking institution and provides private banking, investment banking, and wealth management services.

ABB is an industrial giant and operates in the robotics, heavy electrical equipment, and automation & control systems industry.

Logitech is a Swiss technology company and is one of the world’s largest manufacturers of computer peripherals.

Spain and Italy:

Spain and Italy are home to many industrial, luxury goods, financial institutions, and consumer goods companies. Examples are:

BBVA is a financial institution based in Spain and has a presence worldwide, including Latin America, Turkey, and Eastern Europe.

The Italy-based luxury car manufacturer needs no introduction. Ferrari is now entering the EV market with the first vehicles expected in 2025.

Geopolitics: threats and opportunities

The European Union has, over the years, witnessed a few crises. The monetary union has made it easy for the various states to trade easily with each other and the world. However, the lack of a fiscal union has, from time to time, posed issues. The largest of these was the European debt crisis. The crisis originated due to the inability of countries such as Greece, Spain, Portugal, and Italy to refinance or repay their government borrowings. The European Central bank had stepped in and used the European stability mechanism and European financial stability facility to bail these nations out. The ECB also lowered interest rates, which continue to remain low today, with negative rates prevailing in some member states. The European stock market underwent a period of drawdown and volatility during the debt crisis between late 2010 and early 2012. However, the post-crisis recovery was sharp and rewarded investors who held on to European equities.

Source: Morningstar

The second major crisis was the decision by the UK to leave the Union. Historically, the UK has had an acrimonious relation with continental Europe and was a crucial player in the two World Wars. Ever since it joined the Union, the Eurosceptics within the country have time and again criticized it. With a referendum in 2016, UK became the first country to leave the Union. While the longer-term economic ramifications for both the European Union and the UK are difficult to gauge, the markets reacted severely during the run-up to the referendum, especially in the UK. Here again, the correction turned out to be short-lived, with a strong bounce-back, rewarding investors.

Source: Morningstar

Trends and Themes:

Europe is a forerunner in many of the modern technologies and practices. The continent is a torchbearer for the perils of climate change, pollution, and global warming. Having enforced some of the strictest emission norms, European countries have promoted the broader adoption of greener alternatives. The EU has targeted a 32% share of renewable energy in energy consumption by 2030. Many European nations have plans to phase out new internal combustion engine vehicles by 2035. Europe is the largest market for electric cars, with a 43% share of the EV market.

For more insight into the EV industry, read our earlier blog on this subject.

Investing in Europe:

Europe is the second-largest capital market after the US. An allocation to European equities brings the two-fold advantages of diversification and opportunity for long-term growth. Europe also has a more extensive set of value-oriented stocks and is compelling in terms of diversification from this angle.

One could invest in European stocks by directly buying the ADRs of those traded stocks in the US. However, the ETF route offers a more comprehensive choice, with broad ETFs like the Vanguard FTSE Europe ETF (VGK) and iShares MSCI Eurozone ETF (EZU). Country-level ETFs like the iShares MSCI United Kingdom ETF (EWU), iShares MSCI Germany ETF (EWG), and iShares MSCI Switzerland ETF (EWL) offer a more concentrated exposure. Currency hedged ETFs like the WisdomTree European Hedged Equity Fund (HEDJ) are available too.

The array of choices can be overwhelming. To address this situation, Globalise offers a curated portfolio of European ETFs in the Europe Focus Globes.