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What happened to European stocks starting April 2015?


RuleNumberOne
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The FTSE MIB (Italian index Europe's third-largest economy) is up less than 1% since April 2015.

The DAX (German index, Europe's strongest economy) is up by less than 7% since April 2015.

 

The European stagnation has been going on forever. The ECB already owns one-third of all government debt of the Euro area.

 

Can the Italian government fake GDP growth rates (of -0.1% to 0.1% every quarter for the last two years) or are those growth rates real? Even with zero interest rates they still need to refinance the debt because there is no hope of ever repaying it.

 

Will Europe crash or will it manage to stay forever in the zero-rate zero-growth state?

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I don't know the answer but if you look at the ETF VGK it is even worse, they have gone nowhere since 2006.  On a pure price basis the index is actually lower than in 2007.  I assume it has to do with bank shareholders being basically wiped out.

 

I suspect that stagnant demographics and socialism is just a wicked combination to overcome but my opinion is hardly scientific.  Curious to see others thoughts.  The EU stocks are much cheaper based on shiller ratio than their US counterparts so if this is just a temporary issue, they could be good investments.

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The story is really a lot worse. The Stoxx 600 index has gone no-where since the year 2000. Peaked around 400 in March of 2000. Currently the index sits around 416.

 

Additionally, the front page of the B section in today's WSJ shows China's Shanghai has gone nowhere in ten years. In-fact, -6.9%.

 

I keep wondering if we're due for a period of stagnation in the US.

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The story is really a lot worse. The Stoxx 600 index has gone no-where since the year 2000. Peaked around 400 in March of 2000. Currently the index sits around 416.

 

Additionally, the front page of the B section in today's WSJ shows China's Shanghai has gone nowhere in ten years. In-fact, -6.9%.

 

I keep wondering if we're due for a period of stagnation in the US.

 

Gundlach points all of this out in a recent presentation.

 

Basically says Japan reached it's peak in the 1990s and has yet to surpass it's prior highs.

 

Europe reached it's peak in the early 2000s and has yet to surpass it's prior highs.

 

Emerging markets/China reached their peak in 2008 and have yet to surpass their prior highs.

 

His point is that U.S. equities are likely the next to peak and not reach their prior highs for 10-20 years.

 

 

As far as why - I'm sure it's a combination of things.

 

Starting valuations of the look back (European stocks ere arguably massively over valued in 2000s). On top of a negative starting point, Europe was much slower to re-act and delver the banking sector following the 2009 crisis slowing the recovery AND has a head start of a few years on the aging demographics as compared to the U.S. Lastly, Europe tends to have more onerous regulations AND hasn't participated much in the development of new industries/improvements (i.e. Facebook's, Google's, Netflix, Tesla, etc).

 

Put it all together and you get a decade plus of underperformance but I'd say the largest factor was starting valuations - the latter stuff would have been compensated for if you bought at single-digit mutliples.

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I'd take another angle and suggest that European indices just have more crap companies in them than the US.

 

I think that if you look at the top European funds, they've done pretty nicely over time and outperformed their benchmarks, by 'avoiding the bad stuff'.  Ditto with China, even more so.

 

The US has by far the most high quality and efficient index, so it's done better, and is also extremely hard to outperform over the long-term.

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1) I think multiples in Europe have compressed over the years. They were quite richly valued in early 2000’s and valuations have come down.

2) Overall, quality is lower, as measured by ROIC. Demographics are worse, but with export oriented economies, that’s not necessarily a restriction to growth.

3) There is less of a shareholder culture in Europe. most Europeans hold no or very little stock and there is no 401k equivalent. Large buyers like this tend to create a steady bid and that. is missing in Europe.

4) I recently looked at some very LT performance numbers and based on memory, since the DAX was created in 1990, the index is up by about 7.8x, which is quite similar to SP500, so over the longer term, at least the German index has performed equivalent. That said, it outperformed in the 1990 and underperformed since the GFC. It’s similar to emerging markets and I think the correlation is no coincidence.

5) The financial sector is permanently impaired . Banks, but also life insurers etc. are impaired by a combination of negative interest rates and competition.

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From afar, it seems a combination of, on average, lower quality companies compared to S&P 500 as some have mentioned, lower interest in equities from the average European(possibly because of a greater reliance of socialist programs to subsidize ones retirement), and probably also something to do with the financial system/banks there being a mess. Negative rates are probably also a factor. I know of a surprising number of EU investors who look at US Treasuries and CDs as gold mines and its solely because of the risk free comparable over there.

 

Some still seem to do ok, again showing its a game of skill. I've found few better at it here than John Hjorth. Every once in a while whipping out a stud of a stock pick plucked from his neck of the woods. But otherwise, its tough hunting it seems.

 

 

 

 

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I was thinking about this further this evening, specifically the massive US outperformance over the last 10 years. One huge force driving the domestic markets has been the collection of tech/software businesses which have collectively created literally trillions in market value. It's extraordinary to think about. Mark Andreeson famously wrote a piece in the WSJ (2011 I believe) which said something like "software is eating everything." I actually read the article the day it was published in the print edition of the WSJ. Unfortunately I wasn't smart enough to see or understand the future as he was describing it. Would be interesting to see a study on how much impact, say, the 10 or 20 biggest tech names have contributed to the market surge. Obviously the recovery of the big banks has been helpful too.

 

I keep thinking if you don't have these tail winds, and others like falling interest rates & QE, the next 10 years are going to be a much different story. 

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I was thinking about this further this evening, specifically the massive US outperformance over the last 10 years. One huge force driving the domestic markets has been the collection of tech/software businesses which have collectively created literally trillions in market value. It's extraordinary to think about. Mark Andreeson famously wrote a piece in the WSJ (2011 I believe) which said something like "software is eating everything." I actually read the article the day it was published in the print edition of the WSJ. Unfortunately I wasn't smart enough to see or understand the future as he was describing it. Would be interesting to see a study on how much impact, say, the 10 or 20 biggest tech names have contributed to the market surge. Obviously the recovery of the big banks has been helpful too.

 

I keep thinking if you don't have these tail winds, and others like falling interest rates & QE, the next 10 years are going to be a much different story.

 

Its funny you mention tech, but I was looking through some stuff over the weekend and just continued to be amazed at truly how much market cap some of the tech companies have. Not just the Googles and the Amazon's or Saleforces... not even the top 10-20 per say. I am hardly a tech investor, at all. But when looking at, say, ADSK, SPLK, TWLO, WDAY...thats 4 companies and well over $100B in market cap! And I'd wager 9/10 everyday Americans dont even know what they are, and probably even a big number of investors couldn't give you all that great of an answer on what each one does and how it differs from the next tech co. But dont stop there, you can easily continue to find more... ADBE, VMW, NOW... there another quarter trillion... Its utterly remarkable.

 

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Is Europe/Italy in a stable equilibrium or not? Italian government doesn't have the money to remove toxic waste from a steel plant, but owes $2.3 trillion?

 

Italy

- allowed a budget deficit of 2% of GDP

- miraculously reports 0% GDP growth for 7 quarters in a row

- ECB zeros out the interest rate, debt-to-GDP keeps climbing.

- December factory orders in Italy had the worst contraction since 2013

- Largest steel plant of Europe looks to shut down in Italy

- Italian government gives legal immunity against toxic waste from the plant for buyers (see below).

- Closes schools on windy days to protect children from toxic fumes from the steel plant.

- German car production falls to 23-year low in today's news (Italy must be part of the supply

    chain).

 

https://www.dw.com/en/debt-and-doom-loops-the-eurozones-italian-nightmare/a-50019077

 

"Italy owes $2.3 trillion (€2.06 trillion) in public debt. That's around 133% of its GDP — a massive ratio that puts it in the top five in the world.

 

While the majority of that stock of borrowing is weighing down banks in Rome and Milan, European banks are severely exposed in the event of anything going wrong. France is in the hole for a potential €285 billion according to a study by Bloomberg, while German, Spanish, British and Belgian banks also have cause for concern."

 

 

https://www.nytimes.com/2020/01/04/world/europe/italy-ilva-arcelormittal-steel.html

 

"Outside, a towering smoke stack loomed above a landscape of blast furnaces and stockpiles of dangerous minerals. Dark puffs of industrial exhaust drifted in the sky like rain clouds. On “wind days,” the mayor cancels school for fear of toxic dust blowing through the town.

 

“I’m constantly cleaning,” Mr. Musciacchio said, showing how the metallic soot stuck to a magnet. Photographs on the wall honored his mother and other relatives who he said had died of cancer. “They died from living here, breathing here.”

 

At this point the steelworks appears to be too big to fail, and failing too much to keep running.

 

Its history mirrors the trouble of Italy’s broader economy, which over the last decade has, according to a leading Italian economist, experienced its lowest growth rates since the country formed in the 19th century."

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I was thinking about this further this evening, specifically the massive US outperformance over the last 10 years. One huge force driving the domestic markets has been the collection of tech/software businesses which have collectively created literally trillions in market value. It's extraordinary to think about. Mark Andreeson famously wrote a piece in the WSJ (2011 I believe) which said something like "software is eating everything." I actually read the article the day it was published in the print edition of the WSJ. Unfortunately I wasn't smart enough to see or understand the future as he was describing it. Would be interesting to see a study on how much impact, say, the 10 or 20 biggest tech names have contributed to the market surge. Obviously the recovery of the big banks has been helpful too.

 

I keep thinking if you don't have these tail winds, and others like falling interest rates & QE, the next 10 years are going to be a much different story.

 

This was a factor for sure. I also think that overall (ex tech sector) profit margins for the same type of businesses in the US and Europe should be quite different. Take healthcare, for example. The difference in what US and EU hospitals charge for the same type of procedures may be as high as 10:1. And healthcare is a sizeable chunk of the index. Telecoms? I guess it is about 2:1 for broadband and mobile plans. And so on.   

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Europe has some good companies but it's amazing what shooting yourself in the foot as a society and system can do to reduce returns. UK and Canada and Australia have not had great returns either due probably to commodity focus.

I don't necessarily disagree but, if you have time, can you provide evidence backing this up?

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I want to relive the 2008 meltdown. Italy needs to leave the Euro.

 

Italians were richer than Americans until they switched to the euro

 

 

"Italy was not always this way.

 

In the 1980s and 1990s, Italians were richer, on a purchasing power parity basis, than Americans. They managed that because Italy used the lira, and the currency was competitively devalued. It made Italian goods and services cheap, and spurred growth.

 

At the same time, Italy's debt load is rising. It currently stands at about €2 trillion ($2.25 trillion). Debt to GDP has reached 130%, a level not seen since World War II.

 

"The public debt ratio [to GDP] will probably continue rising and eventually prove unsustainable," Allen said."

 

https://www.businessinsider.com/italy-perma-recession-systemic-crisis-threatens-eurozone-2019-4

 

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https://think.ing.com/snaps/germany-new-orders-nov-19/

 

Looks like the Euro doesn't work for Germany either?

 

"Germany: Getting worse instead of getting better

 

A sharp fall in November industrial orders shows that a bottoming out of the manufacturing slump is anything but near

 

Currently, 2019 is on track to record a monthly average drop of some 0.6%. Moreover, while 2018 was mainly about weaker foreign orders, the order book deflation reached the domestic economy, with domestic orders dropping faster than foreign orders. To illustrate how unique this long stretch of falling orders is for German industry, the last time German order books shrank for two years in a row was in in 2001 and 2002. Ahead of the Great Recession, order books shrank by 2.9% on average every month in 2008.

 

All in all, there are still no signs at all of a bottoming out for German industry. Instead, the free fall continues. In fact, there is simply one word to describe the current state of the German industry: ‘dire’.

"

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https://think.ing.com/snaps/germany-new-orders-nov-19/

 

Looks like the Euro doesn't work for Germany either?

 

"Germany: Getting worse instead of getting better

 

A sharp fall in November industrial orders shows that a bottoming out of the manufacturing slump is anything but near

 

Currently, 2019 is on track to record a monthly average drop of some 0.6%. Moreover, while 2018 was mainly about weaker foreign orders, the order book deflation reached the domestic economy, with domestic orders dropping faster than foreign orders. To illustrate how unique this long stretch of falling orders is for German industry, the last time German order books shrank for two years in a row was in in 2001 and 2002. Ahead of the Great Recession, order books shrank by 2.9% on average every month in 2008.

 

All in all, there are still no signs at all of a bottoming out for German industry. Instead, the free fall continues. In fact, there is simply one word to describe the current state of the German industry: ‘dire’.

"

 

This is all true to some extend, but as I mentioned before , most Germans don’t own stock and the unemployment rate is 3.2%, which is full employment and then some. The unrest in the populace, which will eventually eventually Merkels removal (imo) is related to I immigration policy etc and not to economic issues.

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Europe has some good companies but it's amazing what shooting yourself in the foot as a society and system can do to reduce returns. UK and Canada and Australia have not had great returns either due probably to commodity focus.

I don't necessarily disagree but, if you have time, can you provide evidence backing this up?

 

Proof (I assume you mean the empirical kind) for something such as that will always be indirect at best since it's impossible to isolate the variable under study.

 

An  example of indirect evidence of what he's saying is in fact the lackluster return of the index discussed in this thread (but it can never be proof as so many other factors are present and can't be controlled pr compensated for).

 

The reason why his statement is obviously true is simple logic. However I won't delve into that as not to derail the thread into a political one.

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Europe has some good companies but it's amazing what shooting yourself in the foot as a society and system can do to reduce returns. UK and Canada and Australia have not had great returns either due probably to commodity focus.

I don't necessarily disagree but, if you have time, can you provide evidence backing this up?

 

Proof (I assume you mean the empirical kind) for something such as that will always be indirect at best since it's impossible to isolate the variable under study.

 

An  example of indirect evidence of what he's saying is in fact the lackluster return of the index discussed in this thread (but it can never be proof as so many other factors are present and can't be controlled pr compensated for).

 

The reason why his statement is obviously true is simple logic. However I won't delve into that as not to derail the thread into a political one.

Thanks. That's a fair answer and let's not waste time (and residual reciprocal sympathy :) ) discussing politics.

Long term wise, some countries, such as the US have done relatively well compared to others and there may be 'obvious' reasons for that.

https://engineeredportfolio.com/2017/07/30/which-country-has-the-best-stock-market/

 

However, going back to the idea of this thread, it seems to me that European stocks, in general, showed a comparable performance to US stocks, from the end of the 1990s to around 2010. What happened since then is quite a significant divergence and that raises some questions (some of them perhaps not worth discussing on an investment board):

-Are the countries part of Europe doing OK and it's the European project falling apart?

-With the divergence in the banking sector explaining most of the total divergence, is the US 'winning' or is Europe acting as a leading indicator?

http://thecorner.eu/world-economy/european-versus-us-stockmarkets-european-banks-against-us-technology-firms/76071/

Note: The article was written in October 2018 and the author felt that things would "normalize".

So are things normalizing or becoming more absurd?

 

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Yeah, labor laws in Germany don't allow layoffs to happen right away, they take years to take effect.

 

2019 jobs cuts in manufacturing total 100k with more expected in 2020.  The DAX is close to its all-time high despite the job cuts! I just want the Euro to fall apart because things have gotten very boring.

 

https://www.bloomberg.com/news/articles/2019-11-15/german-industrial-job-losses-top-80-000-with-daimler-cuts

 

"The full effect of the cuts -- which also affect units of German companies abroad --- may not be felt immediately. Labor laws and powerful unions make it difficult to fire workers, and many large companies have agreements banning forced dismissals, meaning job-cut programs have voluntary elements and sometimes run for years."

 

 

https://think.ing.com/snaps/germany-new-orders-nov-19/

 

Looks like the Euro doesn't work for Germany either?

 

"Germany: Getting worse instead of getting better

 

A sharp fall in November industrial orders shows that a bottoming out of the manufacturing slump is anything but near

 

Currently, 2019 is on track to record a monthly average drop of some 0.6%. Moreover, while 2018 was mainly about weaker foreign orders, the order book deflation reached the domestic economy, with domestic orders dropping faster than foreign orders. To illustrate how unique this long stretch of falling orders is for German industry, the last time German order books shrank for two years in a row was in in 2001 and 2002. Ahead of the Great Recession, order books shrank by 2.9% on average every month in 2008.

 

All in all, there are still no signs at all of a bottoming out for German industry. Instead, the free fall continues. In fact, there is simply one word to describe the current state of the German industry: ‘dire’.

"

 

This is all true to some extend, but as I mentioned before , most Germans don’t own stock and the unemployment rate is 3.2%, which is full employment and then some. The unrest in the populace, which will eventually eventually Merkels removal (imo) is related to I immigration policy etc and not to economic issues.

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The DAX is at an all-time high but GDP growth is at a 6-year low.

 

https://www.wsj.com/articles/german-growth-falls-to-six-year-low-hit-by-manufacturing-recession-11579086072

 

"Germany is the first major economy to report full-year growth figures for 2019.

 

The German economy grew by 0.6% last year, the slowest rate since 2013, at the height of the eurozone’s debt crisis.

 

Many German companies have been laying off staff, raising concerns that the manufacturing slowdown could start to affect private consumption.

 

Brose Group, an auto parts producer, said in October it would reduce its German workforce by around 2,000 by late 2022. It blamed the declining auto market, especially in China. Continental AG , a giant auto parts manufacturer, announced plant closures in Germany in November as part of a sweeping restructuring plan.

 

With Chinese economic expansion unlikely to return to earlier rates, German growth “will remain close to zero for now,” said Marco Wagner, an economist at Commerzbank."

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https://www.wsj.com/articles/chinas-auto-market-stumbles-after-30-year-boom-11578949633

 

"“This is now the new normal,” Volkswagen Group China Chief Executive Stephan Wöllenstein told The Wall Street Journal in November. Other major markets typically see ups and downs in car demand every few years, but China has known only growth for three decades. The slump, he said, is “a new phenomenon in China which nobody was really aware of—that an automotive market also could turn down.”

 

Auto makers operated at 76.1% of their production capacity in the July-September period, down 3.5 percentage points from a year earlier for a fifth straight quarter of decline, data from the National Bureau of Statistics show.

 

The downturn has been unfolding for the past year and a half.

When Pangda listed, “the overall Chinese auto market was booming and growing rapidly,” the company’s new president, Zhao Tieliu, said in an interview. “No one could see at that time the market was at a saturated stage and would quickly go down.”"

 

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