To what extent is divergence between US and European stock markets related to structural factors?

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Tellurius
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To what extent is divergence between US and European stock markets related to structural factors?

Post by Tellurius »

To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?

It was difficult to hold US stock for a large percentage of the world population, but over the past 30 years with computerisation and then the rise of index funds, it became much easier. Many people I know were lured by the "shining city on the hill" which the US represents. The US is, in people's minds, a sure bet.

I am asking for numbers here, such as percentage of foreign-ownership of the US stock market vs European ones, or percentage of assets held in the stock market vs real estate or cash for America vs European countries.
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AlohaJoe
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by AlohaJoe »

Tellurius wrote: Fri Sep 11, 2020 3:47 am To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?
None of it is structural in the way you describe.

95% of the difference is due to stronger earnings growth in US stocks and rest is due to a strengthening dollar.

You would expect the factors you describe to show up via multiple expansion but US and ex-US have had nearly identical multiple expansion in recent years (4.4 vs 4.2).

The stronger fundamental performance of US companies is easiest to see anecdotally by just thinking about the performance of US financial companies to European financial companies. But going beyond anecdotes, US financial company performance alone is responsible for nearly 50% of the out-performance of US vs. ex-US.
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JoMoney
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by JoMoney »

I need to find a link to the data again, but I believe it's in the Fed Z.1 Financial Accounts of the US reports/data, but the data show U.S. investors invest more (as a percentage of wealth) in ex-US equities than non-US investors invest in US equities.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Seasonal »

AlohaJoe wrote: Fri Sep 11, 2020 6:14 amUS financial company performance alone is responsible for nearly 50% of the out-performance of US vs. ex-US.
Do you have a link for that?

I wonder what percentage tech might be.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by AlohaJoe »

Seasonal wrote: Fri Sep 11, 2020 6:49 am
AlohaJoe wrote: Fri Sep 11, 2020 6:14 amUS financial company performance alone is responsible for nearly 50% of the out-performance of US vs. ex-US.
Do you have a link for that?

I wonder what percentage tech might be.
It was from a recent Morningstar research piece; sorry I don't have a link handy. IT was responsible for around 1/3rd of the outperformance (less than financials and not actually that much more than consumer discretionary) and most of that was due to sector bias (the US has more IT companies) rather than US IT companies outperforming European IT companies.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by whereskyle »

Tellurius wrote: Fri Sep 11, 2020 3:47 am To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?

It was difficult to hold US stock for a large percentage of the world population, but over the past 30 years with computerisation and then the rise of index funds, it became much easier. Many people I know were lured by the "shining city on the hill" which the US represents. The US is, in people's minds, a sure bet.

I am asking for numbers here, such as percentage of foreign-ownership of the US stock market vs European ones, or percentage of assets held in the stock market vs real estate or cash for America vs European countries.
The reason for the past 11 years of outperformance is primarily fundamental:

https://www.morningstar.com/articles/10 ... ost-decade

US companies grew their earnings by about 7% more per year than ex-US companies. Investors like earnings. This is the simplest explanation. I think it's the most reliable one too.
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Tellurius
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Tellurius »

JoMoney wrote: Fri Sep 11, 2020 6:44 am I need to find a link to the data again, but I believe it's in the Fed Z.1 Financial Accounts of the US reports/data, but the data show U.S. investors invest more (as a percentage of wealth) in ex-US equities than non-US investors invest in US equities.
If total non-US wealth is higher, even with a lower percentage of wealth invested by non-US investors, that may still have a greater effect. We need numbers to know
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by UpperNwGuy »

The US has the major tech companies.
typical.investor
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by typical.investor »

whereskyle wrote: Fri Sep 11, 2020 7:22 am
Tellurius wrote: Fri Sep 11, 2020 3:47 am To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?

It was difficult to hold US stock for a large percentage of the world population, but over the past 30 years with computerisation and then the rise of index funds, it became much easier. Many people I know were lured by the "shining city on the hill" which the US represents. The US is, in people's minds, a sure bet.

I am asking for numbers here, such as percentage of foreign-ownership of the US stock market vs European ones, or percentage of assets held in the stock market vs real estate or cash for America vs European countries.
The reason for the past 11 years of outperformance is primarily fundamental:

https://www.morningstar.com/articles/10 ... ost-decade

US companies grew their earnings by about 7% more per year than ex-US companies. Investors like earnings. This is the simplest explanation. I think it's the most reliable one too.
Well disregarding that currency played about 10% of a role in the difference or that US stocks had a 5% greater multiple expansion (per that M* article), yeah the major contributor is EPS.

Yet, there is no data on how much of EPS growth is from actual earnings and how much is from debt or tax-cut fueled buy-backs, and how much cash is on the balance sheet of foreign companies still.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Valuethinker »

typical.investor wrote: Sun Sep 27, 2020 6:44 pm
whereskyle wrote: Fri Sep 11, 2020 7:22 am
Tellurius wrote: Fri Sep 11, 2020 3:47 am To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?

It was difficult to hold US stock for a large percentage of the world population, but over the past 30 years with computerisation and then the rise of index funds, it became much easier. Many people I know were lured by the "shining city on the hill" which the US represents. The US is, in people's minds, a sure bet.

I am asking for numbers here, such as percentage of foreign-ownership of the US stock market vs European ones, or percentage of assets held in the stock market vs real estate or cash for America vs European countries.
The reason for the past 11 years of outperformance is primarily fundamental:

https://www.morningstar.com/articles/10 ... ost-decade

US companies grew their earnings by about 7% more per year than ex-US companies. Investors like earnings. This is the simplest explanation. I think it's the most reliable one too.
Well disregarding that currency played about 10% of a role in the difference or that US stocks had a 5% greater multiple expansion (per that M* article), yeah the major contributor is EPS.

Yet, there is no data on how much of EPS growth is from actual earnings and how much is from debt or tax-cut fueled buy-backs, and how much cash is on the balance sheet of foreign companies still.
Ed Yardeni's chartbook usually has that data, I believe.

US stock buybacks have been a significant but not the only source of EPS growth.

The US domestic economy has had a stronger recovery. The US financial sector has had a far stronger recovery than the European one -- which still includes the problematic German banks, British zombies like RBS (still 70% state owned), the Italian banking sector.

And there's the super tech stocks. The big 5 internet companies. I believe that much of the US stock market performance since 2018 is those 5 companies? Which have outperformed the rest of the US index, as well as the European one.

Europe has almost no big tech stocks. SAP & ASM Lithography are the two I can think of, off hand. ARM was bought out by Softbank, and NVidia is now trying to acquire it.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Dude2 »

I work with folks from Denmark -- very smart and capable software engineers. It has occurred to me, "It is obvious to expect big things here. I should buy stock in their company." Unfortunately, their company is private and has some weird state-owned nebulous portion that an outsider can't grasp. Nevertheless, what I say is true. Their education is outstanding. They have those among them that have been contractors for Microsoft, etc. This company is clearly just as good, if not superior, to a US tech company (although at a small scale).

Isn't this an example of a fundamental structural factor? They have great pension plans, socialized medicine, etc. and very high taxes. In terms of the global stock market, this technical talent is invisible. Now multiply that by some factor to reflect the same in other European countries.

Our intuition says that to have the most affect on the stock market, you must be as capitalistic as possible.

Another structural item may stem from culture. Take France. They do very well with customers in the Middle East because they have established long, trusting relationships. However, they don't seem to be very cut-throat in terms of protecting market share. In this regard, they aren't "sharks." They have a niche, and they stay in it. Unfortunately, the niche seems to be shrinking.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Valuethinker »

Dude2 wrote: Mon Sep 28, 2020 5:47 am I work with folks from Denmark -- very smart and capable software engineers. It has occurred to me, "It is obvious to expect big things here. I should buy stock in their company." Unfortunately, their company is private and has some weird state-owned nebulous portion that an outsider can't grasp. Nevertheless, what I say is true. Their education is outstanding. They have those among them that have been contractors for Microsoft, etc. This company is clearly just as good, if not superior, to a US tech company (although at a small scale).

Isn't this an example of a fundamental structural factor? They have great pension plans, socialized medicine, etc. and very high taxes. In terms of the global stock market, this technical talent is invisible. Now multiply that by some factor to reflect the same in other European countries.

Our intuition says that to have the most affect on the stock market, you must be as capitalistic as possible.
US legislation in particular the Sarbanes-Oxley stuff, is a disincentive to list on NASDAQ. Formerly, European tech companies often did that.

I agree there is less of a Venture Capital backed, IPO & exit culture in Europe. There is more fear of failure and less capital available to start-ups and private companies in that sense. You see really impressive early stage companies in Europe, but they struggle to get critical mass. In the same way that you don't see a lot of tech startups in Missouri, say, compared to Silicon Valley. Even Boston area is just not anything (in tech, as opposed to say, healthcare) as Silicon Valley. And generally I think Americans and the American economy and society are set up to try in entrepreneurship, and to fail, and to try again. Via their VC funds, institutional investors are part of that.

However I think it is a long, and anecdotal, reach to then say that's why European stock markets have not performed as well (except in the absence of really big tech companies).

The reality is it is the last buyer & seller who set the price for anything. And in that case, the marginal buyer and seller are international investors - both in the US case and the European one. There are some stocks (Tesla?) where retail demand may make a big difference, but at the end of the day global stock markets are fairly fierce discounting machines, they price stocks on the basis of earnings growth in the long run.

EPS growth has been higher for US companies especially financial stocks. Also, the US has a group of super tech cos - Apple Amazon Facebook Google Microsoft - that have done incredibly well and are gaining market share and revenues in the midst of the worst world recession since the 1970s, if not 1945.

I don't think whether Americans have 401ks and Europeans do not figures into this. There are some huge European global investors - think the big insurance companies like Axa and Zurich and Generali.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Valuethinker »

Tellurius wrote: Sun Sep 27, 2020 4:12 pm
JoMoney wrote: Fri Sep 11, 2020 6:44 am I need to find a link to the data again, but I believe it's in the Fed Z.1 Financial Accounts of the US reports/data, but the data show U.S. investors invest more (as a percentage of wealth) in ex-US equities than non-US investors invest in US equities.
If total non-US wealth is higher, even with a lower percentage of wealth invested by non-US investors, that may still have a greater effect. We need numbers to know
You are talking about averages but actually it is the marginal buyer and seller who set the prices.

The marginal investor is global-- big pools of institutional capital.

There are retail-oriented stocks (perhaps) - in particular Tesla. Although the highest retail ownership of any stock was Exxon, from memory, probably reflecting its history as Standard Oil, and then Standard Oil of New Jersey (Esso) -- many of those shareholdings are probably handed down from that era. Also it is the oil company that has never cut its dividend (since the 1930s). Berkshire Hathaway would be another stock that is under-owned by institutions. And of course there are stocks where the Founders still own large percentages, thus making their effective, investible, market cap smaller (Alphabet I believe, Facebook etc).

These global pools of capital skate to the most attractive opportunities. They set the price of European stocks v American based on long run earnings expectations. EPS so things like share buybacks do affect that.

Italians have had high personal savings rates and low consumer debt relative to Anglo-Saxons. That does not translate into a strong stock market.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Forester »

Tellurius wrote: Fri Sep 11, 2020 3:47 am To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?

It was difficult to hold US stock for a large percentage of the world population, but over the past 30 years with computerisation and then the rise of index funds, it became much easier. Many people I know were lured by the "shining city on the hill" which the US represents. The US is, in people's minds, a sure bet.

I am asking for numbers here, such as percentage of foreign-ownership of the US stock market vs European ones, or percentage of assets held in the stock market vs real estate or cash for America vs European countries.
Just 12 years ago, which was yesterday, China hit a CAPE ratio of 70. Emerging & Europe were both more expensive than the USA before the GFC. Bogleheads are pretty level headed but when it comes to the USA things turn sentimental.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by asif408 »

I'm not sure. To what extent was Europe's outperformance during the 17 year period from 1993 to 2009 related to structural factors?: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Seems like in a good chunk of the 1990s and 2000s decades Europe did better. Are you asking about the last ten years, then?
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by JackoC »

whereskyle wrote: Fri Sep 11, 2020 7:22 am
Tellurius wrote: Fri Sep 11, 2020 3:47 am To what extent is the divergence between European and US stock markets in the last 30 years due to structural factors, such as Americans having their retirement savings in the stock market and the ease of investing from abroad?

It was difficult to hold US stock for a large percentage of the world population, but over the past 30 years with computerisation and then the rise of index funds, it became much easier. Many people I know were lured by the "shining city on the hill" which the US represents. The US is, in people's minds, a sure bet.

I am asking for numbers here, such as percentage of foreign-ownership of the US stock market vs European ones, or percentage of assets held in the stock market vs real estate or cash for America vs European countries.
The reason for the past 11 years of outperformance is primarily fundamental:

https://www.morningstar.com/articles/10 ... ost-decade

US companies grew their earnings by about 7% more per year than ex-US companies. Investors like earnings. This is the simplest explanation. I think it's the most reliable one too.
It's also a quite plausible one. The idea that US stocks are obviously overvalued relative to European but the two markets are so compartmentalized that smart money can't just buy Europe and sell US all day long: much more extraordinary claim, if plausible at all. Some professional (and retail) money thinks that's true, there are always differing opinions. But trying to study ownership patterns as explanation really has to suppose that not even enough money to affect prices at the margin can find its way from one market to the other where one is obviously more attractively priced, but such barriers to funds flow don't seem to exist. So the natural first places to look are earnings relative to past and therefore market's presumed ex ante expectation (check, US companies have tended to do better, very likely to a degree not fully priced in X yrs ago) and sectors the global market likes better, as of now, being more prominent in the US index, again check. Arguably not only tech, but really kind of also for 'financials'. The dominant names in Europe tend to have business models more focused on traditional lending directly to companies than any big US bank. That hasn't been a good business; and big US names have tended to increase their lead over European ones in global disintermediated capital markets (underwriting and trading) business. The latter may sound 'rah-USA', but there are also some not necessarily positive reasons US firms generally might have increased earnings more, like relative decline in competition in various sectors of the US economy relative to Europe's, good for incumbent companies for the time being but not necessarily as positive even for shareholders when looking forward.

As to the future though my starting assumption is relative market efficiency, market knows the above, so from now having some money in Europe (and otherwise non-US) is avoiding making an undiversified bet that the trends than have made better US stock performance better will continue *more than the market expects and currently prices*.
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Re: To what extent is divergence between US and European stock markets related to structural factors?

Post by Robot Monster »

Tellurius wrote: Fri Sep 11, 2020 3:47 am I am asking for numbers here, such as percentage of foreign-ownership of the US stock market...
Appears to be 16%.

Image

See, "Foreigners are buying US stocks like never before" on this page
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