Why European Stocks Could Continue to Underperform




GURUSHINA: Since you mentioned the recession, I think when we talk about global growth, there is something else interesting happening right now. Mainly it looks like there is a discrepancy, rising discrepancy between growth outlook in the U.S. and Europe. From your point of view, what does it mean for investment opportunities?

VAN ECK: Well, we said going into the year that Europe was the place to watch, because the ECB is taking away the punchbowl in normalizing their monetary policy. There’s some really weak sisters in Europe that we needed to worry about. I think probably we should have mentioned as well is the U.S. tax plan, by lowering corporate rates to 20% or so really is not good for Europe either. So on the margin it’s going to dampen growth a little bit in Europe, I would expect, in the first half as businesses just move their business activity around a little bit, so it’s something to watch. You know, we’re not calling for a major risk; it’s just something to watch. So that’s the category I’d put it into. Not actionable, but definitely leave it on the research agenda.

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Market Realist

As the graph above shows, GDP growth in some of the major European countries slowed down in the last quarter. Stocks in the Eurozone (EZU) have declined by 6.5% year-to-date (or YTD).

In contrast, the US GDP growth has been accelerating over the past eight quarters. The S&P 500 index has risen 0.8% YTD.

The new US tax law that the Trump administration introduced late last year has encouraged a lot of US companies to bring back cash hoarded abroad. Apple (AAPL) and Microsoft (MSFT), for example, have over $250 billion and $140 billion in cash abroad.

The new corporate tax rate also encourages US companies to relocate some of their operations to the United States, which could affect the European economy due to fewer jobs.

The European Union also faces heightened political risks, with Italy being the latest source of that risk. The political risk in Europe has led to wide credit spreads in the region.


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