European equity markets are significantly underperforming their US and UK counterparts this year, leaving investors questioning the region’s near-term prospects. The pan-European STOXX 600 index has managed a gain of only 3.2% in 2024, compared with a 14% rise for the S&P 500 and a 7.8% advance for the FTSE 100. Analysts point to three structural headwinds that explain the divergence.
First, the eurozone economy remains stuck in low gear. Germany, the bloc’s largest economy, narrowly avoided a technical recession in the third quarter but continues to suffer from weak manufacturing output and falling export orders. The Ifo business climate index fell to 85.7 in October, its lowest level since the pandemic. ‘Germany’s industrial heartland is struggling under the weight of high energy costs and reduced demand from China,’ said Dr Helena Richter, senior economist at Berenberg.
Second, energy prices remain a persistent drag. European natural gas prices are still roughly four times higher than pre-crisis averages, squeezing margins for energy-intensive industries such as chemicals, steel and automotive. Unlike the US, which benefits from cheap domestic shale gas, European manufacturers face a structural cost disadvantage that is prompting some companies to relocate production abroad.
Third, political instability is eroding investor confidence. France’s hung parliament and Italy’s fractious coalition government have made it difficult to pass pro-business reforms. The spread between French and German government bond yields widened to 78 basis points this week, a sign of rising risk perception. ‘Political fragmentation is adding a risk premium to European assets that is not present in the US or UK markets,’ noted James Mallinson, head of European equity strategy at Barclays.
For UK investors, the underperformance matters because many pension funds and multi-asset portfolios hold significant allocations to European equities. The St. James’s Place Managed Growth Fund, for example, has 18% of its assets in European stocks. If the region’s growth outlook does not improve, returns could remain subdued. Source: Financial Times, Ifo Institute, Berenberg, Barclays