Europe’s stock market: an introduction to investing on the continent

In this short guide, we explain key details about the region’s stock market and indices. 

Europe is one of the world’s wealthiest continents and home to some of the most important economies, businesses and brands. It is a part of the global economy that no investor can ignore, and in this short guide we explain how the region’s stock market and its various indices work.

Stagnating continent

The first broad point to make regarding Europe is that it has performed relatively poorly over the past decade. As of 4 December 2020, in sterling terms, the MSCI AC Europe TR index has returned 90% over the past 10 years. In contrast, the MSCI USA TR index has provided 315% and the MSCI All Country World index ex Europe has returned 209%.

There are several related reasons behind this. The past decade has not been a great one for European economies. Following the global financial crash, a new financial crisis emerged: the eurozone debt crisis. Attempts to reduce the debt burden of certain European nations meant large contractions in economic output. While some economies such as Germany experienced relatively decent economic performance, taken as a whole, Europe’s economy has been sluggish compared to North America or Asia. Poor economic performance has translated into poor share price performance.

• Why you should use ETFs in your SIPP
• Investing in the US stock market: a beginner’s guide
• Japan’s stock market: the basics every investor should know

However, the fallout from this debt crisis has further hurt European equities, due to the resulting ‘geopolitical risk’. In response to the debt crisis, certain European countries have experienced a rise in anti-EU political movements, most notably in Italy and Greece. This has led to fears of a break-up of the eurozone, which has the potential to be economically catastrophic. These fears have been reflected in share prices. In addition, there has been the headwind of Brexit, with investors concerned about the exact shape of the EU and UK’s trading relationship.

The poor performance of Europe is also the result of the type of companies found on the continent. The past decade in financial markets has been characterised by the steady outperformance of large growth firms, most notably tech companies. European markets lack such companies. Added to that, European markets have a lot of banks and other financial services companies. The slow economic performance of the eurozone in recent years has meant the European Central Bank has taken interest rates below zero, which is generally not good for banks.

Whether European stocks will start to rebound remains to be seen. Over the past decade, commentators have predicted Europe’s rebound, but it has not happened.

What is Europe?

Before investing in Europe, any investor must first ask themselves: what exactly is Europe? If you are looking to gain broad exposure to Europe, it is wise to have a rough idea of what you mean by that.

Do you mean all countries, from Europe’s eastern borders to Ireland, that have historically been seen as Europe? Or do you mean members of the EU, thereby excluding Switzerland, Norway and the UK? Or perhaps you just mean the countries that are now part of the eurozone currency union, thereby excluding nations that have not joined the euro. Or, are you seeing things from a UK perspective, where Europe simply means every country on the continent?

• Want to buy and sell international shares? It’s easy to do. Here’s how
• An in-depth look at investing with ETFs
• How to invest using ETFs: a beginner's guide

There is no right or wrong answer, and as readers will see, there are different indices to cover most of these definitions of Europe. It is up to the investor to decide how their definition of Europe fits in with their portfolio. As a general rule though, many investors prefer to keep their UK equity exposure separate from their broader European exposure.

The EURO STOXX indices

When people talk of European indices what they are usually referring to is a version of the EURO STOXX series, run by the German stock exchange Deutsche Börse Group.

Perhaps most popular is the EURO STOXX 50 index featuring the 50 biggest stocks from the 11 countries in the eurozone – that is, countries that use the euro. As a result, the index is dominated by France (36%) and Germany (33%). Also accounting for a reasonable share are the Netherlands (17%), Spain (7%) and Italy (4%).

There are several ETFs that track this index with very low charges. The iShares EURO STOXX 50 UCITS ETF (LSE:EUE) is one of the most popular and has an ongoing charge of just 0.10%. However, even cheaper is the Xtrackers EURO STOXX 50 UCITS ETF (LSE:XESC), charging 0.09%, and the HSBC EURO STOXX 50 ETF (LSE:H50E), which charges just 0.05%.

However, this index fits one specific definition of Europe noted above: those using the euro. As a result, it excludes several relatively important markets such as Switzerland and the Nordic nations.

• Ian Cowie: potential Covid-19 cure turbocharged my ‘forever fund’
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

Global indices for the region

Like other regions around the world, the ‘local’ EURO STOXX indices series is facing stiff competition from big global brands, notably MSCI, FTSE-Russell and the S&P Dow Jones Indices.

The MSCI Europe index, for example, is much larger than the EURO STOXX 50, including around 450 equities, both large and mid-cap. However, it also includes non-eurozone countries, and its biggest weighting is towards UK equities, accounting for more than 20%. As a result, this index may not be appropriate for investors who already have a lot of UK stocks and are specifically looking for European ex UK exposure.

A solution would be the MSCI Europe ex-UK index, which holds roughly 350 stocks. This can be tracked via the iShares MSCI Europe ex-UK ETF (LSE:IEUX), which has an ongoing charge of 0.4%.

Another option is the FTSE Developed Europe ex UK Index. This also includes large and mid-cap exposure, with around 450 holdings. This index can be tracked using the Vanguard FTSE Developed Europe ex UK UCITS ETF (LSE:VERX), which has a very reasonable ongoing charge of just 0.10%.

However, it is worth remembering that both the MSCI and FTSE indices have significant exposure to non-eurozone countries even when the UK is excluded. Both have around 20% exposure to Switzerland, for example. So investors choosing between a EUROSTOXX and MSCI or FTSE tracking fund should keep that in mind.