Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 159

The investment case for Europe

While most Australians think of Europe as a great holiday destination, it probably remains under-appreciated as an investment opportunity by many investors. After all, Europe comprises a wide range of countries with differing cultures and business climates. The region’s economy has also struggled in recent years with relatively low growth and stubborn price deflation, and debt problems in countries such as Italy and Greece.

Europe offers a potentially good investment destination and diversifier for Australians. Thanks to the continued growth in the Australian exchange traded fund (ETF) industry, it has never been easier for Australians to get exposure to European companies.

Europe’s equity performance has been surprisingly good over the medium/long-term

Although its economies have continued to struggle of late and the European equity markets have pulled back over the past year, it has performed relatively well in recent years and its medium-term prospects remain favourable. As seen in the table and chart below, the Wisdom Tree Europe Hedged Equity Index (in local currency terms) has produced annual compound returns of 7.4% p.a. over the three years to April 2016, compared to 5.0% p.a. for the Australian S&P/ASX 200 Index.

Europe v S&P/ASX200 Total Return equity performance to 29 April 2016, local currency

 

Unlike Australia, Europe is a net commodity importer, meaning it has benefited from the decline in commodity prices in recent years. What’s more, due to low inflation and relatively more spare capacity, the European Central Bank is likely to remain more accommodative than the US Federal Reserve for the foreseeable future, meaning European stocks could benefit from ongoing monetary stimulus and a cheaper and more competitive currency.

Relative valuations for Europe are relatively attractive

Relative to underlying growth in their respective economies, the European equity market appears to offer comparably good value to that of the United States. As the chart below suggests, although both markets have broadly posted similar performance over past cycles, the US equity market has outperformed that of Europe in recent years. There is catch up potential in Europe should the historical performance similarities return in the future.

Good dividends and scope for better profitability in Europe

Another feature of European equities is that companies in the region tend to pay out higher dividends than their US counterparts, meaning they offer one of the better sources of income potential for Australian investors seeking international equity exposure. On some profitability measures – such as return on equity and profit margins - European companies still tend to lag US companies, so there’s scope to improve earnings as companies strive to improve shareholder value.

A source of diversity

There is value in having a diversified portfolio, and Europe offers different sector exposures from those found in Australia, with notably less weighting to financials, offset by more exposure to the consumer, industrial and technology sectors.

An investment in Europe is easier than ever

The growth of ETFs has made it easier to invest in Europe, with several products available on the ASX providing Australian investors with a diversified exposure to the European equity market in a single, transparent fund with competitive management costs. For example, the ASX-traded ETF, HEUR, aims to track the Wisdom Tree Europe Hedged Equity Index.

When investing internationally, investors have a choice to either hedge or not to hedge currency risk. Not hedging currency risk effectively means investment performance will often reflect two disparate factors: the performance of the international equity market itself, and the performance of that market’s relevant currency. In the case of an unhedged investment in Europe by Australian investors, for example, any returns from the equity market would be offset to the extent the Euro fell against the Australian dollar – though, of course, returns would also be boosted if the Euro rose in value.

Another advantage of currency hedging in Europe with very low (in fact currently negative) overnight interest rates is that it gives Australian investors the ‘carry trade’ (i.e. the relative difference between European interest rates and those in Australia). This carry trade currently provides approximately 2.25% per annum benefit. The interest rate differential boosts returns over time (so long as the interest rate differential remains positive). This is because the process of hedging currency risk is akin to borrowing Euros (at very low rates) – to offset the currency exposure from the investment in European equities – and then using these borrowings to buy Australian dollars which earn a higher interest rate return.

 

David Bassanese is Chief Economist at BetaShares Capital. This article is general information for educational purposes and does not address the specific needs of any individual investor.

 

2 Comments
Graham Hand
June 09, 2016

Thanks for the feedback, Jerome. I note we did say in the covering comments, "Australian investors may be wary of the European share market with Greece and Brexit in the news ..." plus the heading states it is the case for European investing.

We have also been conscious of writing about a market opportunity but then being so pure about not mentioning any products that we don't explain how an investor might implement the idea. So we feel it is worthwhile in some articles showing an actual investment product, but it's a line we are conscious of crossing.

 

Leave a Comment:

RELATED ARTICLES

ETFs playing bigger role for investors

The challenges of building a lazy portfolio

Know your fund types and structures – an acronym odyssey

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.