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Europe, if you are a stock investor, is now bigger than the US. The landmark, passed last week, has been achieved despite the retirement of a net €107.1bn (£72.4bn) in European equity over the past two years, according to Citigroup. Its import goes far beyond the noise over the impact of Sarbanes-Oxley corporate governance rules.
That said, there are caveats. First, the definition of “Europe” is one that economists, market analysts, or even geographers would not normally recognise. It covers all of “emerging Europe” – including Turkey and Russia. This is “Europe plus Siberia and Anatolia”. By crossing the Urals, “Europe” includes Russia’s fuel reserves. By crossing the Bosphorus, it gains the Turkish economy, currently growing at more than 6 per cent. The population of this “Europe” is about 2.5 times that of the US. North America, including Canada and Mexico, might be a better comparison.
Secondly, while the Thomson Financial/Datastream indices show this landmark, the FTSE and MSCI indices, more widely used by international investors, do not. MSCI shows the US as 37 per cent bigger than Europe. This is because Datastream, unlike FTSE and MSCI, does not adjust for the size of free floats, and hence gives European market cap full credit for formerly nationalised companies where governments retain a stake. This better captures underlying value, but MSCI and FTSE arguably better capture the reality facing investors.
But Datastream still captures a secular trend. Europe’s economy is growing faster than the US. The euro has gained against the dollar for all of this century. Germany out-performed all other big markets in the first quarter, with the Dax up 4.85 per cent. The S&P 500 was flat.
Some of these factors could prove temporary. But the shift in corporate culture looks deep. For decades, through boom and bust, US companies were more focused on shareholder value, and delivered far higher returns on equity than their European counterparts. Restructuring has turned that round. According to Absolute Strategy Research, European companies managed a return on equity last month of 17.5 per cent, compared to 16.5 per cent for the US.