European stocks drawing attention after Dior rally

Remy Cointreau [RCOP] and Christian Dior [DIOR] performed really well this morning, rising 13% and 9% respectively, after the two companies reported strong earnings in the last quarter of 2023.

The French drinks maker and Dior’s parent firm luxury brand LVHM both said their sales grew by around 10% in the last three months of the year, particularly in Asia where their high end products remain a hot favourite.

The rally drew attention to European stocks and prompted a closer inspection of how other European shares are faring compared with their US and UK peers. The outcome was surprisingly positive.

Typical forecasts on how European stock markets will do over the coming year tend to hinge on expectations of GDP growth in the bloc, particularly in Germany, with a little bit of analysis thrown in of what the European Central Bank will do with interest rates – neither of which look particularly promising for Europe.

But Cointreau and LVMH’s performance demonstrate why that analysis is incomplete and that a better forecast would include two more aspects: the fact that some European sectors are still undervalued compared with their US peers and therefore trading at a discount, and the fact that most of Europe’s best performers no longer depend on the European market alone for their growth and instead continue to expand in the wealthier parts of Asia.

How European stock growth detached from GDP growth

According to Morningstar research, in 2023 the performance of European shares has detached from GDP growth, particularly in Germany. The largest European economy experienced recession with a modest 0.4% decline in GDP and yet its stock market was up over 12%, one of the best performing in Europe. This can be traced back to, on the one hand, investors pulling their investments from China and allocating them to Japan, Europe and the US.

On the other hand, for a lot of German and French companies, particularly consumer goods and luxury brands, the buyers are not only in Europe but also the US and Asia and therefore they are harnessing the growth in other markets.

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European stockmarkets vs US and Europe vs UK

At first glance European stocks still can’t match the growth in US stocks. The rallies in the US markets are typically faster and more pronounced, as is the case with spectacular growth in tech stocks.

But if we compare the wider market which includes a more diverse range of companies, then European performance is on a par with that in the US. For instance, the Dow Jones Industrial Average rose 12% over the last 12 months and nearly 52% over the last five years. The DAX rallied within percentage points over the same period while the CAC 40 increased by 7.25% on 12 months and up 52% over five years.

For those of us living in the UK it might be more kind to skip the comparison with the FTSE 100 (down 2% on the year, up 8.6% on five years).

Luxury goods and alcohol are not the only sectors seeing upside in their stocks. In Italy and Spain the big drivers of recent growth have been large domestic banks like Unicredit [UCG] (+96%), Intesa Saopaolo [ISP] (+40%), Santander [SAN](+43) and BBVA [BBV] (+56). In Germany four blue chips: SAP [SAP], Siemens [SIE], Allianz [ALV] and Deutsche Telekom [DTE] helped boost the DAX over the last year.

So I will be pouring myself a (small) glass of French brandy later today and having a closer look at European stocks worth investing in.

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