The easy answer is because it’s where I’m based: with hundreds of analysts, bloggers and other writers around the globe, I do not have any competitive advantage in trying to be the “smartest guy in the room” looking to identify misunderstood small caps in the US or the next Tencent in Asia.
On the other hand, while in my career I’ve covered stocks globally, I have developed a better knowledge of the idiosyncrasies of the many local European markets.
In addition, the overall interest in equities in Europe, especially among retail investors, is still well behind both the US and Asia. Not only this prevents the explosion of Reddit-style meme stocks (valuations are more “reasonable”), but it also means that traditionally European markets are less efficient:
Banks still control the distribution networks, and they are mostly asset gatherers, not profit maximisers
There is a less developed financial culture and in many countries much less sophistication from institutional investors (compared to the US, including but not limited to pension funds)
There are fewer value investors (you decide whether this is a positive or a negative…)
Finally, there is a greater percentage of family-controlled companies: under the right conditions these can be excellent long-term investments (major shareholders supervise management directly, focus on durability and organic growth vs. expensive M&A, …), but most of the times they get little attention from investors.
Europe is also often seen as very much “just old economy”, stuck in the 19th and 20th centuries and only relevant in a handful of industries, most notably luxury, while lagging behind when it comes to the digitalisation of the economy, with no super platforms comparable to the FAANGs in the US and BATs in China. According the Financial Times (“The EU has a new weapon in the stock market battle”):
“US markets have hosted 954 IPOs in 2021, while all the exchanges in the EU and UK combined have seen 389, according to Dealogic. Domestically listed Asia Pacific and American companies have each grown significantly as a share of total global market capitalisation since 2006, while European companies (including those in the UK and Switzerland) shrank from 30 to 17 per cent of the total.”
“US markets and Asian markets have a much more vibrant economic hinterland.”
“Europe does not lack innovative start-ups. But global investors have historically discounted their revenue potential relative to rivals elsewhere because the continent’s economies are growing more slowly and national borders make it harder for companies to scale up.”
However, Europe’s VC investment in tech has doubled in the last 3 years, outpacing the growth seen in the US and Asia (although it is still 3x smaller than in the other 2 regions), and Europe has produced more tech IPOs than the US in the past 5 years (albeit with a much smaller average deal size). [Source: Goldman Sachs, “Europe’s digital economy at a tipping point, January 2021]
Technology won’t be the primary focus of my deep dives (I admit of not being an expert on the sector, which most of the times also lack a well-defined moat that is a key criteria in my investment approach), but it does affect many other related industries. Logistics, for example, which is a key, profitable enabler of ecommerce growth. Or payments/fintech, both enablers and beneficiaries of digitalisation. Or even telecom and network infrastructures.
There is more than meet the eyes in European markets, and valuations are also more attractive: on average, it is “easier” to find mispriced companies. This is my plan for this journey.