European stocks suffer year to forget

Bear and bull statues outside the Frankfurt Stock Exchange. Markets in Europe have had a torrid time. Bloomberg

This has certainly been a year to forget for European equities but there are a number of reasons why investors might end up remembering 2018.

First up, the last time cash outperformed equities and bonds was in 1994, according to Bank of America Merrill Lynch. You need to go all the way back to 1969 for the last time cash returns were positive while equity, credit, and government bond returns were all negative. If that’s not sobering enough, consider that the slump in stocks from their January highs wiped out about $17 trillion of global market capitalisation, equivalent to the gross domestic product of the European Union.

“Economic momentum is deteriorating in the US and there is little evidence of a stabilisation, not to mention an improvement, in the rest of the world,” said Fabrizio Quirighetti, chief investment officer for Syz Asset Management. “Yes, valuations are cheaper than three or six months ago, but in a context of deteriorating macro backdrop, as we are now, they probably aren’t cheap enough to justify per se a sustained rebound.”

Once again, the Stoxx Europe 600 Index proved unable to sustain a break through the ceiling that has capped its gains since 2000 and the benchmark has now broken the long-term bull trend it started in 2009.

The optimism around European equities at the beginning of 2018 proved short lived as they succumbed to the shocks of trade wars and slowing global growth that battered global markets. The continent brought more misery upon itself as investors recoiled from the never-ending Brexit saga, budget turmoil in Italy, mayhem sparked by the Yellow Vest protests in France and renewed worries about Greek debt.

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To make matters worse, European companies delivered lacklustre earnings and gains in corporate profits lagged behind their US counterparts, boosted by huge tax cuts from the Trump administration.

The Stoxx Europe 600 has closed out its worst year since the financial crisis, a decline that has depressed stock valuations to a six-year low. The index’s price-to-earnings ratio is back at 2013 levels, and dividend yields haven’t been this high since 2012. For months, analysts have been saying European stocks are cheap, few more so than the pummelled auto sector, where P/E ratios have dropped to 5.8, while bank stocks trade at just eight times estimated 2019 earnings.

That’s failed to entice investors, who have used just about any bounce in stock prices this year to sell. More money fled European stocks in 2018 than any other major region, with outflows in 40 out of the past 41 weeks. EPFR Global’s numbers show that European equity funds have lost about $73 billion of assets this year. The closest thing to a silver lining is that 2016 was even worse, when the exit totalled $100bn.

The broad sell-off has left every sector in the red, with banks and autos in a race for the bottom spot. Top-performing industries in the first half, such as basic resources, technology and retail, were later overwhelmed by trade tensions and faltering economies. High-flying oil stocks began to fall to Earth in October as crude prices tumbled. WTI crude slumped 40 per cent in 55 trading days and remains near $45 a barrel, compared with $76 less than three months ago.

Not only is this the worst year for European equity returns since the financial crisis, trading volume has also dwindled to the lowest since 2000. That long list of uncertainties from London to Rome and Paris to Athens has driven investors away.

The Euro Stoxx 50, home to the 50 biggest companies in the Eurozone by market value, entered a bear market on Thursday, joining Germany’s DAX and Italy’s FTSE MIB, which descended to the level earlier this year. After Friday’s bounce, the Stoxx Europe 600 benchmark is about 4.2 per cent from its own bear market.