Markets
Picking Investments is Nothing Like Buying a New Car
As consumers, we are used to researching the many choices we have before making a buying decision.
For most people, the process of buying a new product (such as a car) might look something like this:
- Recognize a need
- Search for information
- Evaluate options
- Make a purchase
- Evaluate satisfaction with purchase
In other words, we figure out what we need, and then we seek to learn more about our choices. After reviewing relevant articles, product ratings, buyer reviews, and other sources of information, we can make a final and informed decision.
Same Process For Picking Investments?
Does the above process look similar to how you approach investing, particularly in choosing funds?
If so, Vanguard says it might be worth re-framing how you look at things. Here’s why picking investments is different.
Vanguard, which manages over $3.5 trillion in assets, may have a good point.
The past performance of a car model is hugely important to a consumer’s decision. That’s because the next Honda Civic built in the factory is guaranteed to be much like previous Honda Civics before it.
For investments, however, everyone knows that past performance does not predict future results. And even though this advice is ubiquitous in the investing world, it is still commonly ignored by many investors.
Here’s what happens to top performing funds:
Even though top funds did well in previous years, there isn’t much correlation with the future.
In the above case, top-rated funds got an influx of capital, which made it harder to get the same return. Funds rated five stars by Morningstar received $60.7 billion in new inflows, but dropped 147 basis points in annualized returns in their subsequent 36 month periods.
The other reason for this is that fund management is just a relatively level playing field, and it’s hard to stay a top performer over the long-term.
The best funds leading up to 2010 were all over the place for the next five years, and only 16.2% of them continued to be top performers. Meanwhile, an astonishing 24.1% of the top performing funds fell to the bottom performing quintile, while 12.5% of funds were liquidated or merged.
Keeping this all in mind, Vanguard recommends adopting a different process for picking investments:
We can’t say we disagree for almost any type of portfolio.
Markets
The European Stock Market: Attractive Valuations Offer Opportunities
On average, the European stock market has valuations that are nearly 50% lower than U.S. valuations. But how can you access the market?
European Stock Market: Attractive Valuations Offer Opportunities
Europe is known for some established brands, from L’Oréal to Louis Vuitton. However, the European stock market offers additional opportunities that may be lesser known.
The above infographic, sponsored by STOXX, outlines why investors may want to consider European stocks.
Attractive Valuations
Compared to most North American and Asian markets, European stocks offer lower or comparable valuations.
Index | Price-to-Earnings Ratio | Price-to-Book Ratio |
---|---|---|
EURO STOXX 50 | 14.9 | 2.2 |
STOXX Europe 600 | 14.4 | 2 |
U.S. | 25.9 | 4.7 |
Canada | 16.1 | 1.8 |
Japan | 15.4 | 1.6 |
Asia Pacific ex. China | 17.1 | 1.8 |
Data as of February 29, 2024. See graphic for full index names. Ratios based on trailing 12 month financials. The price to earnings ratio excludes companies with negative earnings.
On average, European valuations are nearly 50% lower than U.S. valuations, potentially offering an affordable entry point for investors.
Research also shows that lower price ratios have historically led to higher long-term returns.
Market Movements Not Closely Connected
Over the last decade, the European stock market had low-to-moderate correlation with North American and Asian equities.
The below chart shows correlations from February 2014 to February 2024. A value closer to zero indicates low correlation, while a value of one would indicate that two regions are moving in perfect unison.
EURO STOXX 50 | STOXX EUROPE 600 | U.S. | Canada | Japan | Asia Pacific ex. China |
|
---|---|---|---|---|---|---|
EURO STOXX 50 | 1.00 | 0.97 | 0.55 | 0.67 | 0.24 | 0.43 |
STOXX EUROPE 600 | 1.00 | 0.56 | 0.71 | 0.28 | 0.48 | |
U.S. | 1.00 | 0.73 | 0.12 | 0.25 | ||
Canada | 1.00 | 0.22 | 0.40 | |||
Japan | 1.00 | 0.88 | ||||
Asia Pacific ex. China | 1.00 |
Data is based on daily USD returns.
European equities had relatively independent market movements from North American and Asian markets. One contributing factor could be the differing sector weights in each market. For instance, technology makes up a quarter of the U.S. market, but health care and industrials dominate the broader European market.
Ultimately, European equities can enhance portfolio diversification and have the potential to mitigate risk for investors.
Tracking the Market
For investors interested in European equities, STOXX offers a variety of flagship indices:
Index | Description | Market Cap |
---|---|---|
STOXX Europe 600 | Pan-regional, broad market | €10.5T |
STOXX Developed Europe | Pan-regional, broad-market | €9.9T |
STOXX Europe 600 ESG-X | Pan-regional, broad market, sustainability focus | €9.7T |
STOXX Europe 50 | Pan-regional, blue-chip | €5.1T |
EURO STOXX 50 | Eurozone, blue-chip | €3.5T |
Data is as of February 29, 2024. Market cap is free float, which represents the shares that are readily available for public trading on stock exchanges.
The EURO STOXX 50 tracks the Eurozone’s biggest and most traded companies. It also underlies one of the world’s largest ranges of ETFs and mutual funds. As of November 2023, there were €27.3 billion in ETFs and €23.5B in mutual fund assets under management tracking the index.
“For the past 25 years, the EURO STOXX 50 has served as an accurate, reliable and tradable representation of the Eurozone equity market.”
— Axel Lomholt, General Manager at STOXX
Partnering with STOXX to Track the European Stock Market
Are you interested in European equities? STOXX can be a valuable partner:
- Comprehensive, liquid and investable ecosystem
- European heritage, global reach
- Highly sophisticated customization capabilities
- Open architecture approach to using data
- Close partnerships with clients
- Part of ISS STOXX and Deutsche Börse Group
With a full suite of indices, STOXX can help you benchmark against the European stock market.
Learn how STOXX’s European indices offer liquid and effective market access.
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