Investors may be surprised to learn that European equities have been the best-performing major equity market over one, two and three years in constant currency.

The chart below shows this outperformance over three years, as well as the close correlation of the MSCI World Index to the US market (S&P 500). Having seen significant outflows in 2022, the start of 2023 has seen some inflows to Europe. We think there are several reasons why investors should consider increasing their allocation to European equities.
Europe outperforms
Total market trends 2023
Source: Bloomberg, as at 4 May 2023 (total return in USD)
Europe offers diversification
The top five MSCI World stocks are US tech names – presumably, investors own these for growth, yet the some of the top names in our European strategy have generated better revenue growth over the last year as seen in the chart below. Despite this, these five European companies trade at a discount to this set of US peers (12-month forward P/E average of 25 times for the Europeans vs 32 times for the US companies).
US tech vs Europe
Market Multiples
Market trends 2023

Note: LTM shows 1-year numbers

Therefore, it is unsurprising that global equity returns — for example those measured by the MSCI World — are closely correlated to the US stock market performance due to the high weighting of North American stocks. This means that global indices share a similar reliance on the performance of a small number of large US tech names. The European market on the other hand has far less exposure to technology companies, and notably more exposure to consumer staples and industrial companies (see chart below). Therefore, Europe provides, what we believe is an excellent opportunity for investors to diversify their equity portfolios.
Europe is different – sector weightings
Market Progress
Source: Bloomberg, as at 31 March 2023.
Companies not economy
The outperformance of the European equity market has been out of step with the European economy, which has seen slowing GDP growth in the last two years. According to the International Monetary Fund, Europe’s annual real GDP growth rate will fall to 0.6% in 2023 vs North America’s 1.6%.

The contrast between equity returns and the economic growth reflects the fact that Europe is home to many leading global companies, particularly within luxury goods (LVMH, Richemont), healthcare (Novo Nordisk), and consumer staples (Nestle, L’Oréal). Indeed, less than 50% of the revenue for European companies comes from Europe; these companies are based in Europe but global in nature – as is our strategy.

We believe that ignoring or underallocating to Europe is passing up an opportunity to invest in a large market with global-leading companies in growth markets that you can’t get access to elsewhere. For example, luxury goods demand is growing globally and it is European companies as noted above that have the brands that people want to own.