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.

 

  •   7 June 2016
  • 2
  •      
  •   

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

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Latest Updates

Superannuation

Superannuation’s structural failings

Politicians are fighting over access to super, but they may be arguing about the wrong thing. The system’s three fundamental flaws have been hiding in plain sight for decades, costing Australians far more than they realise.

Planning

The great wealth transfer myth

Why do some families preserve wealth for generations while others struggle to? As the great wealth transfer unfolds, the determining factor is often not the structure of the estate, but the preparation of those who will inherit it.

Investment strategies

What comes after bank hybrids?

For years, bank hybrids have been a cornerstone of portfolio income. With tens of billions of dollars now disappearing from the market, investors face a critical question: what comes next, and are the obvious replacements enough?

Investment insights from the US

What happens when knowledge becomes a commodity? The latest themes emerging from the US tech sector suggest AI could reshape company moats, disrupt incumbents and create winners and losers in unexpected places.

Investing

Can Berkshire thrive without Buffett?

Warren Buffett's departure marks the end of an era. But the more important question for investors is whether Berkshire's culture, discipline and capital allocation framework can survive without the man who built them.

Retirement

The Bengen 4% Rule: Lost in translation

For years, retirees have been told to focus on withdrawal rates. But the real question is far simpler: how many dollars can you safely spend? The answer may be very different from what conventional retirement wisdom suggests.

Interest rates

Super low interest rates came with side effects

For more than a decade, investors lived through an era of near-zero interest rates. With bond yields now surging, it's worth asking whether cheap money solved economic problems, or introduced a much larger set of risks.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.