Don’t Bet Against America: Why U.S. Growth Still Beats Europe and China Liz Peek
The big investment (and political) story of late suggests that the U.S. has lost its way, all because of President Trump. The administration’s “chaotic” trade policies and the U.S. fiscal picture, pundits tell us, are driving investors to send money elsewhere. American exceptionalism, we are told, is on the way out.
The Economist, for instance, posits that the U.S. is falling behind in the global race. But – spoiler alert – they’re struggling to win the argument.
Case in point: recently one of their writers, Stanley Pignal, head of the magazine’s Brussels bureau, wrote an amusing piece about Europe titled “The Unbearable Self-Indulgence of Europe.”
He sums up the European mindset thus: “The world is going to hell, meaningful economic growth is a long-forgotten phenomenon, and by the way what are your plans for summer?” What does Pignal think should keep Europeans up at night? War, of course, and Trump (he may be a realist but he’s still works for the Economist) and also, “its big companies are also-rans and the continent’s population is shrinking for the first time since the plague seven centuries ago.”
In short, “Europeans know the global race for economic supremacy is lost.” Why? Because “the continent’s business model endures: it is a third poorer than America, works a third less, and is a lot more tanned at the end of August.”
Meanwhile, last Friday cousin publication the Financial Times sounded the alarm: “Big investors lose faith in American exceptionalism,” saying concerns about US deficits and trade policies have caused a “sell-off in the dollar and left Wall Street stocks lagging behind European rivals”. The author points out that after 15 years of outperformance that has driven US markets higher, big investors have been shifting funds overseas. Why? Partly because Germany has decided to spend a boatload of money on infrastructure and defense.
But, the FT piece concludes with a welcome reality check: “Europe still has sclerotic growth and a very high level of regulation, and China is still complicated.”
There’s no question that big European stocks have outperformed those in the US this year. The MSCI Europe index has moved 21% higher since the beginning of the year while the S&P 500 is up only 2%.
But here’s why Europe is attracting interest: because they’ve suffered 15 years of underperformance, stocks are relatively cheap. Over the past 10 years, the MSCI Index has risen at an average annual rate of just under 7%. The S&P 500, by comparison, has climbed at just over 12% annually.
As of May 30, the iShares Core MSCI Europe ETF had a price/earnings multiple of 17.6; the S&P 500 P/E ratio today is 28.3. So, yes, some EU stocks are cheaper, and investors are taking advantage of that.
But the disparity suggests Europe’s future is less bright than America’s, with which we agree. Our companies dominate most of the fastest-growing industries and we have the enormous amounts of energy needed to fuel those enterprises. Plus, we have a president doing what needs to be done to uncork growth: lower taxes, encourage energy production and lighten regulation.
Such policies are anathema in Europe where the green lobby and militant unions have strangled the economy. China has worse, possibly intractable issues like a declining work force, huge debt and erratic leadership.
Bottom line: take a fling on EU stocks when the price is right, but place most of your bets with Uncle Sam. That’s been a winning strategy and, over time, will be so again.
Comments are closed.
