Europe In Turmoil | Looking for Alpha

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The United States (Invest) rules the world

In case you missed it, the underperformance of non-US equities is now approaching the 15-year mark.

Not only is this the longest outperformance (by one of two baskets – American, non-American), but it is also the second largest magnitude in at least 50 years.

the underperformance of non-US equities is now approaching the 15-year mark.

JPM

In Europe, valuations are even more dire.

The valuation of European stocks (using the Stoxx 600 index) relative to US stocks (using the S&P 500) fell to a new multi-year low.

The multiple of the European index is around 1/3 lower than that of the American index, which would make the former (compared to the latter) the most attractive it has been since 2005.

The multiple of the European index is around 1/3 lower than that of the American index, which would make the former (compared to the latter) the most attractive it has been since 2005.

Bloomberg

Europe is lagging behind in all areas

If we look at the total returns of European exchange-traded funds (“ETFs”) versus the United States since the last time the (valuation) ratio traded as low as it currently does, the differences are simply amazing:

US ETFs:

  • Invesco QQQ Trust (QQQ): +869%
  • SPDR® S&P 500 ETF Trust (SPY): +382%
  • SPDR® Dow Jones Industrial Avrg ETF Tr (DIA): +359%
  • iShares Russell 2000 Growth ETF (IWO): +315%
  • iShares Russell 2000 ETF (IWM): +285%
  • iShares Russell 2000 Value ETF (IWN): +236%

EU ETFs:

  • iShares MSCI France ETF (EWQ): +99%
  • Vanguard FTSE Europe ETF (VGK): +98%
  • iShares Europe ETF (IEV): +86%
  • iShares MSCI Germany ETF (EWG): +81%
  • iShares MSCI Eurozone ETF (EZU): +62%
  • ETF iShares MSCI UK (EWU): +58%

Chart
VGK Total Return Price given by Y-Charts

This could be seen as an opportunity to buy European stocks which are trading much cheaper than US stocks.

We say: Hold your (European) horses!

Now is not the time to transfer money to Europe – and in this article we explain why.

The EU is currently the epicenter of an energy, economic and political crisis. Everything that can go wrong – is, and everything does. Everything at once.

Saudi Arabia's oil exports hit new high in June

Bloomberg

energy crisis

In case you missed it, there is no more “energy market” in Europe.

As a UK resident myself, I can tell you there is no competition at the moment. Until a year ago, I changed energy supplier every year based on the cheaper offer I received from many suppliers. This year, I received none. Zero. No.

My provider (Shell) increased the rates by about 3 times (up to the maximum allowed by the regulator right now), and you can only choose one plan (compared to dozens of plans in the past).

If you don’t like it, you can sit in the dark, but there’s literally no competition and no flexibility.

Take it or leave it.

Electricity prices in Europe

ENTSOe

Now the problem is much bigger than my energy bill, so let me explain this in a bigger context:

Q: How many megawatt hours are there in 1 barrel of oil equivalent (“boe”)?

A: 1 boe = 1.70 MWh

Based on this ratio, wholesale electricity prices in most European countries are now above $1,000/boe!

This is Germany, Europe’s largest economy:

Electricity price in Germany tops $1,000 a barrel of oil

Bloomberg

Economic crisis

The global economy is slowing, but the EU’s is slowing faster than everyone else, “thanks” to the effects of the Russian-Ukrainian war.

The EEZ economy is now back in contraction territory.

While the Services PMI is still pointing to slight expansion (latest reading: 50.2), the Manufacturing PMI is already signaling contraction (latest reading: 49.7).

Eurozone PMI shows activity down for second month due to compressing inflation

Bloomberg

It is important to note that in Germany, the PMIs (services and manufacturing) are already at contraction levels, and it is likely that the only reason why the services reading in France and/or the UK remains at expansion levels is the summer season and holiday/tourism spending which keep the numbers afloat.

Eurozone PMI shows activity down for second month due to inflation compression - Bloomberg

Bloomberg

Soon, once the peak travel season is over and the kids are back in school, we expect things to get even worse.

And once winter begins, with the strong demand for heating, the recession in Europe will probably be even deeper than it currently appears.

Political crisis

With no end in sight to the Russian-Ukrainian war, Europe continues to be in turmoil.

In the United Kingdom, a new Prime Minister (Rishi Sunak or Liz Truss) will be announced soon.

In Germany, The popularity of Olaf Scholz dropped to an all-time high.

In France, Macron warns of an “end of abundance” with France heading for a difficult winter.

For one thing, don’t pay too much attention to apocalyptic headlines; no one will freeze due to lack of energy.

As you can see, natural gas flows to Germany are at an all-time high.

natural gas flows to Germany are at an all-time high.

Andreas Steno, Macrobond

On the other hand, the purchasing power of the average European resident keeps deteriorating and the economy will suffer more, much more.

With such a configuration, it is anything but surprising that the euro lost value, trading below parity against the USD.

There’s nothing surprising about that actually; The US Dollar has always acted as a safe haven during tough times, and when things in Europe go from bad to worse – it is natural for FX investors/traders to stick with the much stronger side/currency.

Euro downside exposure in high demand, with low deltas also in play

Bloomberg

The flip side

Saudi Arabia’s oil exports hit a record $31 billion in June, driven by higher production and prices.

Monthly crude exports exceeded more than $1 billion a day and jumped 94% year-on-year.

Saudi Arabia's oil exports hit a record $31 billion in June, driven by higher production and prices.

Bloomberg

The Kingdom’s trade surplus reached $23 billion in June, representing a 75% year-on-year increase.

With that in mind, it’s no wonder that the major relevant ETFs, representing both sides of the energy coin, have traded over the past year:

Chart
Saudi Arabia given by Y-Charts

The duck/pacifier test

If it looks like a duck, swims like a duck, and quacks like a duck, then it’s probably a duck.

When it comes to (investing in) Europe, all you have to do is use an “s” instead of the “d” in the word “duck”.

Our best advice for you is to try making lemonade out of lemon – to invest in non-European companies that emerge stronger from the European crisis.

For example: non-EU fertilizer/chemical companies.

While in Europe, factories are closed because of the too high price of gas that they have to pay (which is crucial for their activity), American fertilizer stocks are benefiting from the drop in competition.

Soaring gas prices hit fertilizers and chemicals in Europe

HERE

The latest victim (in a long and growing list) is Azoty, Poland’s largest chemical company and the EU’s second largest producer of mineral fertilizers, which has shut down production of nitrogen fertilizers and reduced production of ammonia due to record gas prices.

Meanwhile, non-EU fertilizer and chemical stocks are doing well, posting very nice gains over the past year (and beyond).

Non-EU fertilizer/chemical stocks are doing well, posting very good gains over the past year (and beyond).

Y charts

After a serious setback between mid-April and mid-July this year, fertilizer/chemical inventory prices lost a lot of ground, but over the past 40 days the uptrend has resumed, with very good performance in all areas.

Chart
Total CF Performance Level given by Y-Charts

In the past year, we’ve highlighted this segment twice (here and here) and we still believe there’s room for these stocks to rise further.

When it comes to investing, “Duck” and “Suck” can end up with good luck.

Mary I. Bruner