Is Europe becoming uninvestable?

[changegonnacome]

9 hours ago, Parsad said:

https://finance.yahoo.com/news/nearly-50-000-companies-face-181828021.html

 

Cheers!

 

Low interest rates allowed Zombie companies to continue to operate......those Zombie's consumed the most important capital of all - human capital....while destroying the economics/pricing power of non-Zombie companies...the low/no growth of the 2010's can be seen in the context of a misallocation of that human capital.

 

Europe in some ways was the worst offender as they went literally negative on rates.

 

Capitalism is brutal - when allowed to operate - creative destruction recycles resources into activities that have merit.

 

It appears that Zombie's with debt stacks maturing into 2024 are finally going to have their moment. 

 

Europe is going to be at the forefront of this.

[Parsad]

8 hours ago, changegonnacome said:

 

Low interest rates allowed Zombie companies to continue to operate......those Zombie's consumed the most important capital of all - human capital....while destroying the economics/pricing power of non-Zombie companies...the low/no growth of the 2010's can be seen in the context of a misallocation of that human capital.

 

Europe in some ways was the worst offender as they went literally negative on rates.

 

Capitalism is brutal - when allowed to operate - creative destruction recycles resources into activities that have merit.

 

It appears that Zombie's with debt stacks maturing into 2024 are finally going to have their moment. 

 

Europe is going to be at the forefront of this.

 

I agree with you.  They just have to go through the pain.  And they aren't the only ones...I think most of the world is going to share a similar experience to some degree.

 

Cheers!

[changegonnacome]

2 hours ago, Parsad said:

And they aren't the only ones

 

Yep there are interesting industries that were just destroyed by low rates.... it did the opposite of what textbooks said it would cause it threw a lifeline to competitors who ordinarily would have gone extinct. Darwinian capitalism was paused for a decade plus - and certain industries were just ruined by this.

 

European telecoms IMO is an example of this IMO.......normal rates would have seen 5 player markets consolidate into 3 player ones where more rational pricing would have emerged. Low rates allowed the 4th and 5th player to continue to operate destroying the unit economics for everybody.

 

Normal rates are forcing function for this moving forward and heretofore terrible businesses will become less terrible....and that can be enough for excellent equity returns if you pick your spots. Europe is a good hunting ground for this - just given it was one of the worst ZIRP offenders.

[MxMI17]

https://www.wsj.com/economy/europe-regulates-its-way-to-last-place-2a03c21d?mod=hp_lead_pos4

 

“America innovates, China replicates, Europe regulates”

 

[CorpRaider]

IMO, they just need a little Regan revolution.  Stuff can change.  The wall fell.

 

I agree the ZIRP hurt them more.  The common currency doesn't make a ton of sense.  NEXIT would be a step.

Edited January 31 by CorpRaider

[mattee2264]

Not a huge amount of evidence of pain. Euro stocks have been on a bit of a tear lately with a 1 year return of almost 20% and that was without the benefit of having Mag7 or equivalent to do all the heavy lifting. While the eurozone narrowly avoided recession in 2023 their inflation rate is down to 2.9% so they will probably able to start cutting sooner than USA. And the interest rate transmission mechanism works faster in Europe so they've probably already felt a lot of the pain from higher rates and adjusted to them. Of course Europe has a lot of regulations and so on but it also has a high concentration of quality multinational companies. 

[schin]

On 1/23/2024 at 11:37 AM, changegonnacome said:

 

Low interest rates allowed Zombie companies to continue to operate......those Zombie's consumed the most important capital of all - human capital....while destroying the economics/pricing power of non-Zombie companies...the low/no growth of the 2010's can be seen in the context of a misallocation of that human capital.

 

Europe in some ways was the worst offender as they went literally negative on rates.

 

Capitalism is brutal - when allowed to operate - creative destruction recycles resources into activities that have merit.

 

It appears that Zombie's with debt stacks maturing into 2024 are finally going to have their moment. 

 

Europe is going to be at the forefront of this.

 

I concur -- those zombie companies are on life support.... Survival of the Fittest and Creative Destruction is held at bay for a while...  You can put parallels to Japan back in the day.... Europe is correcting and hopefully normalizes..but, their socialistic bend keep it from going quicker than the US.

 

There is some bad things happening in China... with real estate companies. 

[Spekulatius]

@schin Which zombie companies in Europe are you talking about? Care to mention specific examples?

[schin]

4 hours ago, Spekulatius said:

@schin Which zombie companies in Europe are you talking about? Care to mention specific examples?

@Spekulatius - I would say the zombie-ish companies are the banks in Germany.  Deutsche Bank and Commerzbank have fixed themselves up. But, there should be more consolidation in Germany for one. It is overbanked. The locally-government controlled savings bank - Spareassen-Finanzgruppe. Pricing is being held down by the weakness offerers like oil producers. It's just not rational. 

 

https://en.wikipedia.org/wiki/Sparkassen-Finanzgruppe

https://en.wikipedia.org/wiki/German_Cooperative_Financial_Group

https://en.wikipedia.org/wiki/List_of_banks_in_Germany

 

Many don't have scale and without government support, would be dissolvent. 

https://www.bankingsupervision.europa.eu/press/speeches/date/2017/html/ssm.sp170927.en.html

 

In Italy, I would say Monte die Paschi -- which they want Unicredit to take over.. but, they passed. Let it die.

 

 

 

[Spekulatius]

@schin  The Sparkassen and Raiffeisen banks resemble credit unions in the US and were designed as member  serving and state/city serving institutions , so they are zombies by design. They, as well as banks in general also have been hurt by ZIRP, which means that things should actually get better for them.

[james22]

A Quick Look at the 21st Century So Far

 

Since 2000, Europe has stagnated on many fronts -- anemic growth, a crashing birth rate, military disinvestment -- from which countries such as Belgium and Germany have still not emerged. Perhaps most worrying of all, according to criteria such as patents, capital investment, and stock market giants such as GAFA (Google, Apple, Facebook, Amazon), Europe has stopped innovating. People innovate in the United States; they still innovate in Asia, but in Europe – hardly at all.

 

If you add to this the European Union's obsession with the environment, which has become little more than a machinery for imposing constraints, vexations, punishments and taxes in the name of "energy transition", it appears that stagnation is a problem from which Europe might have the greatest difficulty in freeing itself.

 

As history shows, stagnation is an intermediate state. Over time, stagnation is almost always the prelude to regression (here, here and here). When Sparta stopped having children, Sparta wasn't defeated overnight. Sparta remained Sparta, for a time, with its glorious city and its military contingents. Afterwards, Sparta was not defeated: it simply gradually disappeared from the face of the earth.

 

https://www.gatestoneinstitute.org/20340/21st-century

[mattee2264]

GRANOLAS is the buzzword driving European indices to all time highs. Their version of the Magnificent 7. 

GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP and Sanofi

 

Internationally exposed quality growth compounders. Now account for around a quarter of the Eurostoxx 600. And are up 60% over the last three years keeping pace with Mag7. 

 

 

[formthirteen]

Weekly news from the EU. Everything is going as planned by the central committee, more sustainability and regulation:

 

https://www.reuters.com/technology/microsofts-deal-with-mistral-ai-faces-eu-scrutiny-2024-02-27/

 

 

Quote

Behind closed doors, Mistral lobbied for exemptions for some AI systems, warning that overly strict laws would hamper European startups' chances of competing with U.S.-based giants. Mistral's deal with Microsoft has led some lawmakers to question the company's motivations.

 

"What is emerging shows even more that it was good not to water down our ambition on the safety of GPAI (general purpose AI) models with systemic risks, following legitimate but strong lobbying from companies like Mistral," said Brando Benefei, a member of the European Parliament (MEP) who oversaw the drafting of the AI Act.

 

EUROPEAN CHAMPIONS?

 

Alongside Germany and Italy, France also pushed for exemptions for companies making generative AI models, to protect European startups such as Mistral from over-regulation.

 

"That story seems to have been a front for American-influenced big tech lobby," said Kim van Sparrentak, an MEP who worked closely on the AI Act. "The Act almost collapsed under the guise of no rules for 'European champions', and now look. European regulators have been played."

 

https://www.msn.com/en-us/news/world/eu-parliament-backs-contested-biodiversity-bill/ar-BB1iYkh9

 

Quote

The rules are a central part of the EU's ambitious environmental goals under the Green Deal -- a set of laws aimed at helping the bloc meet its climate goals -- but farmers say they threaten their livelihoods.

 

The legislation demands the European Union's 27 member states put in place measures to restore at least 20 percent of the bloc's land and seas by 2030.

 

They lament what they say are excessively restrictive environmental rules, competition from cheap imports from outside the European Union and low incomes.

 

 

https://www.reuters.com/business/basf-dials-up-cost-cuts-germany-flags-earnings-rebound-2024-02-23/

 

Quote

FRANKFURT, Feb 23 (Reuters) - Germany's BASF (BASFn.DE), opens new tab will slash another 1 billion euros ($1.1 billion) in annual costs at its Ludwigshafen headquarters, citing weak demand and high energy costs in its home market, highlighting the country's economic troubles.

 

 

 

 

[thowed]

32 minutes ago, mattee2264 said:

Novo Nordisk, ASML, L’Oreal, LVMH

 

I've corrected!  NALL?

 

I'm a bit less down on Europe than I was - structurally it's problematic in terms of regulation, but there are still some great companies.  The above 4.  Hermes of course.  Some Scandi compounders.  A bunch of Swiss mittelstand cos.  etc. 

[mattee2264]

Thought this would be worth an update.

 

Eurostoxx has gone up about 20% since the October 2023 lows after Powell fuelled rate cutting hopes. But really it has gone nowhere over the last decade with a return of around 70-80% with dividends reinvested. Meanwhile USA stock market has gone up almost 200%. 

 

It has its fair share of cyclicals (banks, industrials, oil and gas, autos, chemicals) but majority of the index is represented by growth/quality/defensives such as technology (ASML, SAP), health (Sanofi, Novo Nordisk, Roche), consumer goods (LMVH, L'Oreal) etc. 

 

And over the last week or so it has started to sell off after the French political turmoil is spooking European stock markets. If sell off continues might make an interesting buying opportunity for those looking to diversify outside the USA. 

 

 

[John Hjorth]

On 2/28/2024 at 8:40 PM, mattee2264 said:

GRANOLAS is the buzzword driving European indices to all time highs. Their version of the Magnificent 7. 

GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP and Sanofi

 

Internationally exposed quality growth compounders. Now account for around a quarter of the Eurostoxx 600. And are up 60% over the last three years keeping pace with Mag7. 

 

 

 

On 2/28/2024 at 9:19 PM, thowed said:

 

I've corrected!  NALL?

 

I'm a bit less down on Europe than I was - structurally it's problematic in terms of regulation, but there are still some great companies.  The above 4.  Hermes of course.  Some Scandi compounders.  A bunch of Swiss mittelstand cos.  etc. 

 

@thowed,

 

More like GRANNOOLLASS [, perhaps, all depending on perception]. Despite Europe has been lagging North America in recent decades, it has still been possible to do well by stock picking, simply because structured stock picking  based on rational criteria has been weeding out weak candidates in relevant indexes.

Edited June 14 by John Hjorth

[thowed]

Yep.  I don't understand it especially, but Roche has arguably been pretty cheap for past year, but kept getting cheaper.  But possibly finally on turn in last week or so.  And pretty tasty dividend in CHF.

[Saluki]

I think the EU is a bad idea, but that doesn't make Europe uninvestable.   It's like saying "Is Asia uninvestable?".  China is much different than Japan or the Philippines.  

 

The underperformance of European equities has more to do with the fact that they don't have a silicon valley.  Without MSFT, GOOG, META, AAPL, and NVDA, the S&P500 wouldn't be running circles around Europe. 

 

In a study I saw of countries with the most 100 baggers, it had the usual suspects: US, India and China, but Sweden was also up there.  Most European countries are higher taxed than developing countries, but they also have a lack of corruption, good infrastructure, a highly educated workforce, and respect for property rights. 

 

You can argue that the industrial revolution kicked off in England because wages were so high, so it made labor saving machines worthwhile.  In China many farmers still plant crops by hand.  Labor is so cheap that the outlay for industrial equipment to produce food that isn't expensive is not worth the money. 

 

So, just as there is a reshoring in the US for some manufacturing to prevent another global disruption like what happened in 2020, there may be some bright spots in Europe for manufacturing that requires a lot of capital per worker (the company that makes the machines that TSMC uses to make chips is manufactured in Holland). Iceland produces way more geothermal electricity than it needs, so it became a world leader in Aluminum production, which requires large amounts of electricity.  Maybe that will be attractive for crypto?  Since there are no trees in Iceland, maybe it's a great place for wind power? 

 

I hate shipping, but who dominates in operating shipping companies?  Greeks and Norwegians.  The only American I can name who did well in shipping besides Vanderbilt is George Steinbrenner. 

 

If you look at individual companies, not countries, and focus on bottom up, not top down, I'm sure there are some gems there.  It's like that old joke about the kid who's an optimist and the dad takes him to a barn piled with sh1t to the ceiling.  The kid is ecstatic, and the dad asks what's the bright side of this? He says "with all this sh1t, there's gotta be a pony in here somewhere!" 

[whatstheofficerproblem]

On 10/17/2023 at 3:53 AM, petec said:

Europe is not uninvestable, but you should treat it as an emerging market with more debt and less growth, in my view.

 

And guess what an emerging market with more debt and less growth is? That's right, uninvestable (SriLanka & co), the only reason investors tolerate the risk of investing in emerging markets is because the markets are relatively inefficient in terms of multiples and pricing and the sheer amount of growth opportunities. You remove these and no one will touch these with a 10 foot pole.

 

On 6/14/2024 at 8:37 AM, Saluki said:

I think the EU is a bad idea, but that doesn't make Europe uninvestable.   It's like saying "Is Asia uninvestable?".  China is much different than Japan or the Philippines.  

 

The underperformance of European equities has more to do with the fact that they don't have a silicon valley.  Without MSFT, GOOG, META, AAPL, and NVDA, the S&P500 wouldn't be running circles around Europe. 

 

In a study I saw of countries with the most 100 baggers, it had the usual suspects: US, India and China, but Sweden was also up there.  Most European countries are higher taxed than developing countries, but they also have a lack of corruption, good infrastructure, a highly educated workforce, and respect for property rights. 

 

I agree with Saluki's take above. EU is a broad generalization, there are countries within EU that I would more than willing to be a market participant of, Swedish market for example is something I have no qualms with, country like UK[Englistan] where I will only participate if the upside is too high/special sits and countries like Italy & France that I don't see the need to invest in.

 

In the words of the American Left, [The EU is a spectrum ] It's not a binary unit. There are still hopes for 10 baggers in broader EU, although 100 baggers seem impossible at this stage. 

[UK]

https://www.bloomberg.com/news/articles/2024-09-09/draghi-says-eu-in-danger-without-massive-spending-and-joint-debt?srnd=homepage-europe

[backtothebeach]

In the EU all they can think about is more central planning. Kind of the opposite model of venture capital and creative destruction capitalism:

Draghi Says EU Itself at Risk Without More Funds, Joint Debt

https://www.msn.com/en-us/money/markets/draghi-says-eu-itself-at-risk-without-more-funds-and-joint-debt/ar-AA1qfs5X

 

"Draghi said that Europe will need to boost investment by about 5 percentage points of the bloc’s GDP — a level not seen in more than 50 years — in order to transform its economy so that it can remain competitive. He warned that EU economic growth was “persistently slower” than in the US, calling into question the bloc’s ability to digitalize and decarbonize the economy quickly enough to be able to rival its competitors to the east and west."

 

"Draghi pitched a rewriting of the bloc’s competition policy rulebook so that more money can be pumped into Europe’s key industrial sectors, and pressed regulators to adopt a more creative approach to vetting mergers — which could lead to the approval of more high-profile deals. He called for the EU’s merger watchdogs to take into account the pro-innovative effects of certain deals, which could offset any negative risks to competition."

 

"Draghi drew on the automotive sector for particular scorn, calling it a “key example of a lack of EU planning.”"

[UK]

https://www.bloomberg.com/news/articles/2024-09-09/esg-rules-draw-backlash-from-unilever-totalenergies-and-other-eu-businesses?srnd=homepage-europe

Edited September 9 by UK

[UK]

36 minutes ago, backtothebeach said:

In the EU all they can think about is more central planning

 

And even central planning is very hard to implement:)

[UK]

https://www.bloomberg.com/opinion/articles/2024-09-11/draghi-s-love-letter-to-eu-industrial-strategy-risks-heartbreak?srnd=homepage-europe

 

Introducing industrial strategy is difficult enough in nation-states with long traditions of collective action and popular consent. Draghi’s plans face more formidable problems. The EU decision-making process is glacial, subject to innumerable veto points and dominated by a bureaucratic class that lives in a world as different from the quicksilver world of the internet economy as it is possible to be. The EU is still divided between an EU quasi-government, which pushes for ever more centralization, and national governments that pay the bills, and the politics in both realms is increasingly polarized. Just three hours after Draghi’s speech unveiling the report, Germany’s Finance Minister Christian Lindner declared that Germany “will not agree” to one of Draghi’s central ideas, joint borrowing. That position reflects Germany’s abiding opposition to writing out a blank check to more indebted European governments.

The danger is that Draghi’s central idea (collective investment) will be frustrated by Germany, even as his subordinate ideas become twisted into an excuse for protecting incumbents (particularly the car industry), subsidizing struggling companies and fencing out superior rivals. Draghi’s shiny new industrial strategy might look attractive to a Europe fearful of its fast-deteriorating competitive position relative to China and the US. But the Old Continent is more likely to end up with something different: a hodgepodge of old industrial strategies, some national, some Europe-wide, all of them distorted by vested interests, propping up Europe’s fading economies rather than producing the next Apples or Googles.

[John Hjorth]

On 9/9/2024 at 4:26 PM, backtothebeach said:

In the EU all they can think about is more central planning. Kind of the opposite model of venture capital and creative destruction capitalism: ...

 

Thank you to @UK for bringing some balance to this subject brought up by @backtothebeach above, stressing that I certainly understand @backtothebeach concerns after what he has read.

 

I would suggest to read the Wikipedia article about Mario Draghi, - 'Super Mario' -, Italian, economist, academic, banker, statesman, civil servant, liberal socialist, who lives in a delution of thinking he decides everything, which he obviously and luckily does not. And he also does not have a clue at all about running an automaker in dire straits.