Organize trains.
I'm Joel Webber and I'm Eric Belchernes.
So we spent last episode talking about why the US is so great? Yeah, is there a contrarian take that we should visit today?
Yeah, so a couple things.
First of all, yes, I still think the US has some elements that are special. But this year so far, Joel, Europe, which a lot of times gets dumped on narratively, it's, you know, been in the doghouse for years. It's basically tripling the S and P five hundred. This year it's up nine ten S and p's up two point four percent. You know, will it last or is another head fake? I think it's a good time to give Europe at
least a strong case. You know, we were a little negative last time, and I thought, you know, it would be a good time to look at the other side of the story and maybe there is a reason to allocate there. We have on our team, in the broader strategy team, there has been some research and data that indicates it might actually be for real this time, and I thought we should share all that, get it on the table, and then the listener can can decide.
We'll let them be the jury.
Okay, so joining us, we're going to have your boss, Gina Martin Adams, who's the chief equity strategist at Bloomberger Intelligence, as well as Todd Son, who's the senior ETF and technical strategist at Stratigis Securities, this time on Trian's the case for Europe. Todd, Gina, welcome to Trillions.
Thank you, thank you for having us.
Great to be here with you guys.
Quick note here, Todd is such a trooper that he is doing this from LaGuardia Airport in the pet relief Stagia. If that's the first, and that is a first. So if you hear any little background noise, that's why. And if a dog peas on his leg, we promised we'll let him re record that part. Okay, so just fy, Thank you Todd for being a so dedicated eric.
I want to start with just what is the data when you guys are assessing something like this, What are you looking at beyond just indexes?
Right? So, one of the things that has been apparent for a while is evaluations. Right in the US, the average price to earnings ratio is very high.
In Europe it's lower.
That gap is pretty much I think at historical records, right, So that's the data we would look at now. We only we don't maybe go more than a couple feet deep in the ETF world, but I work with people who go deep into the number. So Gina has put out some reports recently that talk about the weakness in the US and ipso facto a little strength in Europe.
And then Todd put out a note that I read about, I don't know three months ago where he said, I think he called the case for Europe, but his thesis was it can't get worse, which I thought, what an investment thesis is, Hey, come invest here, it can't get much worse. Anyway, that's sort of the state of Europe. So I think we start with Geno with just you know, the US weakness maybe and how that relates to Europe maybe having some good signs.
Yeah, and it's very much the same the same case, just in the polar opposite that you just made, where Europe by November of last year was training at an all time historic discount relative to the rest of the world. The US was training at its PreK peak relative to the rest of the world valuation premium. So the US case the anti US case is really the opposite of
the pro Europe case when it comes to valuations. At the same time, you have to work through the mental gymnastics of what that really means, and what that really means is expectations for the US going into twenty twenty five were extremely high, whereas expectations for Europe are extremely low, and momentum shifts in global stocks oftentimes occur because of
expectation extremes. There's almost no chance that the expectations embedded in US stock prices can be met by US companies, at least in the short term, and you have that adjustment process that emerges, and we've seen that play out real time through earning season, in particular with tech, where suddenly we have competitives, competitors in the tech space that
no one thought it would exist three months ago. That creates a very different environment for tech and for the US, whereas for Europe there was no expectation for growth and suddenly earnings estimate stopped falling. So it wasn't a fantastic evolution of great news for Europe, but expectations were solow
they couldn't get much worse. And then we have decent earnings come through, You've got the Central Bank still easying, You've got some relief in terms of political pressure that has emerged over the weekend with Germany, and that's been enough to get a little bit of momentum moving in the favor of Europe.
Can I say this differently and see how you react to it? Is the US the ultimate growth story and Europe is the ultimate value story?
Yes, I think that's a lot of what we're seeing is also the US is the ultimate tech story and Europe is in some cases the ultimate financial story. So it's a growth value expectations dichotomy and sector performance diconomy that creates an opportunity for Europe and probably puts the US behind rest of the world at least in the short.
Rund Let's go ahead and bring you in.
What did you see as you were working on on your thesis?
So I agree with Gina about low expectations, and to me, it's all about sentiment as well. And one of the funny ways I think I can sum up European ETFs listening in the US is there's fifty ETFs, both combined of the region as well as single country, and they have about fifty seven billion assets, and keep in mind the who've been around for about twenty five years or so.
Take that in comparison.
Relative to the ey Shares Bitcoin ETF, which has only been around for about thirteen months, and that has the same amount of assets. So along with the lines, if it can't get any worse, we're talking about a newer aspect class. It's the same amount of assets as what is a cornerstone of investor portfolios for international and I think along with just assets under management, you look at
product launches, issuers have given up on the space. There's only been two European ETFs launched over the last six years, and they're both very thematic, focused on luxury goods and aerospace and defense. So I like that there's this apathy from issuers. They're not really focusing on the region. I think that's really interesting from an expectations and sentiment standpoint.
So Europe is having this nice pop, I'll call it right up ten percent. That's a lot for Europe, but the flows are not there. Normally, you know, you have a little run, the flows will follow, at least some models will go in. But there's there's been about just shy of a billion dollars into European ETFs from US investors this year. Now that compares to about eighty billion
that have just pumped into US equities as usual. My thesis is that it would take six to nine months to kind of overcome the feeling that we've seen this movie before, or I call it a short film, where it's two months of Europe and then all of a sudden, the cues like a runaway bus just like runs over Europe once again. And that's happened like ten times, and so I understand the Pavlovian response to like not do anything and just wait for the cues to come back.
Do you think this has legs basically? And do you think that's when investors might actually turn around?
I love comparing this to short films, which is like its own category in the Oscars, but like, did you watch it?
Not?
Really?
I think that's the best picture, right, Yes, But I think we need to think about how we measure the legs. Right, there's a very distinct possibility that Europe gathers legs without the ETF universe recognizing it. Because the biggest investor in Europe is the European investor, and that's where you saw the biggest flight from Europe occur is Europe. For Europe was no longer a thing by twenty twenty four. So I think first you probably get direct investments from Europe
in Europe. Some of that is a real nationalistic sentiment that could emerge as a result of the political environment. Some of it is a currency play, some of it is a financial play as a result of the ECB. But we may not actually see US investors contribute to the European story in the form of flows in the ETF landscape, and that we could still see Europe outperform. I would agree to get the US investor interested in Europe. It is a much much bigger hurdle. The US investor
is very isolated in their strategy. They think that all they need to own is the US. The US is the best way to invest in the globe. Is a lot of the rhetoric that you hear from the US investor base that theory will have to get dismantled through several months, if not several quarters, maybe even several years of evidence before the US investor capitulates and says I'm going to fly into Europe. I'm gonna buy a bunch of europe as an opportunity just is very unlikely it
could emerge. This is something that's very unique to this situation. In a world where we have deglobalization as a centralized theme, US companies will potentially have less access to the rest of the world, will become much more isolated as inherent entities. And if that's the case, then suddenly this thesis that you can only invest in the US, you only need to invest in the US in order to access global markets really starts to go away. But that's a really
long term, long tail, secular possibility. It's not likely to emerge in the next month or two.
And just to give some data behind that, Athnoscios on my team Ransom numbers and the percent the last couple of years, a lot of people overseas have invested in the US. That's helped the markets. Europe, though the percentage in in the US has plummeted this year, so they are the ones driving this rally. But elsewhere in the world it's still gone up. People like Asia still buying the US, US still buy in the US. So it is interesting. I have this narrative thing that I think
and narratives matter. I think they can change price can change narrative, so if it goes up enough, then narrative could be broken. But I think most people sit there and think, well, look, yeah, maybe there's a mean reversion trade here, but long term there's more growth in the US. People here work crazy hours. You know. I wrote a note about Jack Bogel, who said you don't need international and he got more savage as he got older, and here's what he's One of the lines he said was,
you know, everyone says I'm wrong. I said, for a lot of reasons, you don't need an international and he says something here, the third largest country in IFA is France.
The soul of hard work. He can't see.
I can't see that I'd make more money in Britain or Japan, YadA YadA, or France where they could and pass the law saying you had to work thirty five hours a week. And I think generally Americans are like in Europe, everyone's at the cafe at three o'clock. Yeah, the companies actually run, but it's just just to get enough done to not like go to hell. And I think in the US it's everyone is in such fierce competition, you get all this, all these flowers blossom in the
forms of new companies and growth and opportunity. How true is that narrative and how hard will that be to a race?
I think it's pretty true.
Frankly, though, I go back to my thesis that a lot of that narrative also is about globalization. In the era of globalization, where the US was becoming this global hegemon, where the US was driving activity, where US corporates were constantly seeking international locations for the destination of their products, where they had a tremendous global dominance. Of course, the
US companies were more productive. At the same time, You're absolutely right, the ructural landscape, the policy landscape in Europe became less and less productive, more and more government interventionist. I think you're at a moment now where Europe is starting to recognize that, in particular in Germany. We saw it very, very profoundly over the course of the last
year in Germany. The Germans themselves are recognizing that they're taking a back seat economically and financially to the rest of the world, and there's a lot of frustration there. So I think there's a potential rallying moment for Europe to think about privatization, think about ways to enhance productivity, think frankly about how to form global relationships outside of
their relationship with the US. So you could make a case that as Germany becomes tighter with China, for example, as Germany seeks other markets to enhance his productivity and global presence, you could see some pretty big sea changes in Europe. The other thing that I would say that's so fascinating to me with respect to Europe right now is the countries in Europe that went through a reckoning moment in the European debt crisis. Now, I know that
this is a long time ago. Not a lot of us remember twenty eleven, but it was a big moment in time for Europe, but only for the debt laden what we called at the time pigs economies Portugal, Ireland, Italy, Greece and Spain. Those economies have transitioned remarkably over the course of the last decade in change. Those are the areas of Europe that are starting to outperform most profoundly. The best performing markets in Europe this year are Spain, Italy, Switzerland,
to a lesser degree. Germany certainly is participating, but where did Spain and Italy come from? That comes from a legacy of change, right, And in the European debt crisis, they had a moment of reckoning, they had to write size spending, they had to think about structural changes. Many of those appear to have been enacted, and the economic optimism in those peripheral economies is significantly greater than some of the other legacy economies, like you is the example
of France or even Germany. So I think that, you know, Europe is a conglomeration of countries and that's something that we need to keep in mind as well. Europe has one big entity, maybe not as investible as some of these other smaller country markets that have been doing very well over the course of the last year or so.
But to Ton's point earlier, there's like a dearth of products, Like Todd, is there a big opportunity here to like actually bring you know, some innovation and ETFs to this space.
So I totally agree with what Gene is saying about the countries are changing, right how they function, and I think this is where there is opportunity for active managers, right, It's nearly impossible based on data to outperform US large cap growth, but because Europe has struggled in terms of performance for so long, I wonder if you're you have
an opportunity for active Europe. Not just active developed markets because those are already just out there, but the there are no active, straightforward European products, and I think those managers can find, you know, the winners of this change that's going on there. I do think it's really interesting the constituency of Europe and ETFs are changing. They were typically very financials heavy and that's still true, but consumer staples influence in the Europe and ETFs has really dropped.
Over the last few years, and now you're seeing more.
Industrials take control and as well as technology, and SAP.
On a given day is the largest weight in Europe. I'm not sure how many people know that.
If you put fifty people in a room, they might guess it's a financial or a healthcare type of company, but it's SAP and then there's ASML.
So I like that there's this change.
Going on and the way we invest in Europe, and I do believe it also speaks to where actives should focus in terms of ETF.
For Shures Todd, one more question for you is what I've found as an ETF anaist over the years is when it comes to emerging market countries and even developed market countries, a lot of the money that would go into say VGK, which is the larger Europe, is retail and that's the money that's not biting right now. However, if you take UK or France or Germany, there is you know, about a billion in each of these single
country ETFs. But they tend to be used by traders who are usually betting ahead of an election, and so a lot of times, like the Brazil ETF comes to mind, if there's some kind of a big event coming up that's geopolitical, a lot of times you'll see flows Russian ahead of that and they'll kind of it's almost like a geopolitical sports book. They're like, I really think UK is going to bounce with this election or this situation.
Do you think that is what we need to see first is a couple traders get excited with the single country ETFs, and then retail will follow with the sort of bigger, broader ones later.
I think so that makes sense, and I'm not even sure about retail, but I'm more so looking at the model providers right so you can look at JP Morgan, you can look at State Street and see what their allocations are to Europe as well, and I don't see much going on there right now.
So I think this is the great part about ETFs, as that was mentioned.
You can place a bet on an event, outcome, election, whatever it might be. But I don't know if Europe, if retail, will follow along or not. It's just it's not sexy enough. It's not leverage, it's not a reconductor. I mean, what about two x pigs? Does that start to get who reason? Does that start to get spicy? And then Europe you can go through.
Put two x on anything and you'll get a couple of bytes.
I boil it down to Okay, we'll retail come back. I don't know.
And then when do the models start coming back to overweight Europe? And I'm just not sure we're anywhere near there yet. It will take far more outperformance for that to continue.
And I have a question for you, Gina, does Europe even have tech? I mean, you know, you think I looked at the best performers in Europe, the financials have driven it. They're up fourteen percent. But I'm looking at the performers. I don't really see any tech e. Is there even a europe Tech ETF. I mean not sure if one exists, Todd would know real quick.
Uh it's almost like a.
Military intelligence.
Yeah.
There was one play in Europe with a semiconductor wave and that was asml in uh U have SaaS out of Germany, but these are not This is a very small component of the European broader market and that's the biggest reason I would suggest why Europe underperformed the last two years is there just isn't a lot of tech, and tech was the area of growth opportunity. It was the area that led global indices, not just the US, but global markets with the most tech exposure outperformed. Aka
Taiwan was a huge outperformer. So that legacy of limited tech is a big part of the story for why Europe was not performing. Now it's helping because tech dropped. It was the only sector in the US that dropped in January. You know, it's not been performing well so far this year as investors are rotating into other opportunities and tech has proven to be a bit of a laggard.
This really does feel like to bring it back to that growth versus value thing, it's like growth will run away with everything and then every once in a while.
Yeah, every decade, Yeah, value will show up and yeah.
Well, if you look at the long term, when did Europe actually outperform for an enduring period of time. It was in the two thousand and one to two thousand and seven period when tech took a backseat to everything. Tech was kind of there, but not outperforming everything, not leading markets. We had a commodities boom, we had a
financial sector boom through a lending cycle. Those are the type of that's the type of environment in which Europe will outperform inevitably because of constituent bias and concentration.
One question, if you're somebody who has a large chunk of your equity allocation in US ETFs, would you would it make more sense just rotate to international and have some Asia in there, or maybe just do Asia. How does Europe compare to other regions relative to the US in terms of this like possibly having a moment coming up.
Yeah, it's very interesting because China has actually performed very very well so far this year, But India has been officially in a bear market, so Asia is in the eye of the beholder. What do you mean by Asia? I have to say because if you think of Asia as China, then it does appear that opportunities are emerging in China, particularly now that we have tech plays emerging
as a potential competitor to the US. But Asia is a very mixed bag because India is in a bear market now, and we have to acknowledge that India had some unique structural issues as well that elevated prices there even as much as they were elevated in the US, and now India is taking a back seat. So Asia's a bit of a mixed bag. When you look at Latin America, you also have a really mixed view between
Brazil and Mexico. Emerging markets in the Middle East and Africa stand out for US as an opportunity, but the investibility of that region is hugely, hugely questionable. How do you even get access to that region, how do you put money to work in that region? But that does appear to be a region of the world where emerging opportunities are huge. Yeah, definitely helps Japan and Australia are
areas of the world we haven't talked about. So if you want to talk developed market, Asia, Japan and Australia are two totally different markets. Japan is also in a bit of a slump after leading along with the tech wave until the middle of last year, and Australia is a very commodity sensitive sector. So it depends on what your thesis is. These are all very very different markets. But right now, yeah, Europe kind of stands out relative to the rest, mostly because of that valuation discount.
And can we talk about the currency real quick, because Todd is old enough to remember, like I am the about ten years ago, these currency GTFP like we're like rock stars. So HGDJ was the big one heads Europe. That one's up twelve percent this year, so two percent better than regular Europe.
What about that?
Could yeah, could a strong dollar actually maybe bring people in back to that currency heads trade?
Yeah? Yes, currencies are a big theme for us this year. We've been focusing a little bit more on the en than anything else. The en, you know, it is typically a very risk off signal. The yen performing very well would suggest that we're maybe some of our optimistic assumptions
regarding global equity performance should be questioned. But with respect to Europe, there are quite a few people who suggest that it was really the dollar rip that ultimately created the downside for Europe and the second part of the latter part of last year, because as the dollar was ripping, the euro was the predominant downside risk that plays its way through earnings in the short run in a very
very negative way. So we saw massive negative earnings or vision momentums when the dollar was at its biggest rip or it's biggest gaining at the point in which it was gaining the most. Now we're seeing a little bit of normalization there and that may be helping Europe. But generally, if the euro gets cheaper, that's great for European exporters, and a lot of these developed market European groups are
very sensitive to European exports. So if you get a combination of China's growth improving and the Euro getting cheaper, that's usually a pretty good sign that we're going to get some earnings momentum emerging in Europe, and that may be starting to price in.
For the less sophisticated folks out there who listen. I'm always a fan of the fifty to fifty allocation fifty hedge fifty unhedged.
Just because it's so hard to get a market right and then get the FX right of it. And I wonder if that's just the water down version of trying to play Europe or international and there's ets for that. So I like the fifty to fifty aspect.
Okay, so just speaking of ETFs for that, I thought what you said arelier about this being a great opportunity for active investors potentially if you could put together that three X pigs or what have you.
What what would you.
Want this to look like for Europe if you could, if you could get go into Europe and have exactly what you want, what would it look like?
Well, I like to defend the industrial names.
I think you have to have some of the those European tech because they've been a beneficiary of this.
Yeah and sorry.
Sorry too, s A P A, s M A, s M L. And then the financials.
This is the first time I can remember that they're actually leading and not causing a problem.
I think this is amazing that we have.
European financials are just stuck and higher, and I think if you're really going to have an issue, whether it's within Europe or within the global economy, you'll start to see those names and their credit backdrop really deteriorate.
I'm sure Gina will be on top of that as well.
The European Financial eu f N, I think it's about to hit new all time high. Eric's that's a long time coming.
Historic.
By the way, there is a three x europe BTF.
There you go get some guts so much an assets it has, Todd, Oh.
God, I don't even I don't even know what the ticker is, to be honest.
It's b u r L twenty two million, which is really small. That means no one cares, there's no juice.
No, but this is this is part of the argument.
But if you're a pops like this, one's up thirty percent this year because it's cripple Europe need more though, But you got some of these single stocky tips go up thirty percent a day.
So this is just like child's play at this point.
All right, well we we have the thing that we can watch now, uh Todd. Gina, thanks so much for joining us on trillions.
Thank you for having us, Thank you very much.
Thanks for listening. To Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify.
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We'd love to hear from you. We're on Twitter. I'm at Joel Webber Show. He's at Eric Waulchuna's.
This episode of Trillion's was produced by Magnus Hendrickson. Bye