Hedge Funds Like These European Companies; Should You?

The US stock market has had a great run since 2009, but lately there have been many concerns voiced that the market is reaching overvalued territory and the bull run might end soon. Warnings regarding a bear market have been expressed in the past as well, but now we have more obvious signs. Since the beginning of 2018, US stocks have entered correction territory twice and the Dow Jones Industrial Average Index is 0.60% in the red year-to-date. S&P 500 is 0.50% in the green and the NASDAQ Composite has recently bounced back into positive territory helped by strong earnings that have been already reported and the prospect that the tech sector will show great results in the current earnings season. Overall, the expectations regarding the earnings season are positive and the main indexes are expected to gain ground in the next weeks.

When it comes to long-term prospects of the US stock market, there seems to be a consensus among analysts and smart money that the bull market still has a couple of years to run, although the returns won’t be as good as in the previous years. A strong US economy, the tax reform that allowed companies to repatriate overseas cash should help maintain momentum, even though the tariffs and potential trade war with China will put some downward pressure on US stocks.

However, there is another popular opinion that European market will remain bullish for longer. Europe started to implement measures after the crisis a year later than the US and saw years of sluggish growth as many countries were plagued by debt crises. It is estimated that recovery in Europe is around 1-2 years behind the US. In 2017, the European Union and the Eurozone saw an economic growth of 2.5%, which outperformed the US’s expansion of 2.3%. In December 2017, the unemployment rate in European Union was 7.3%, so it still has more room to fall. The improving economic outlook helped raise the euro to $1.23 from lows of $1.03 seen at the beginning of 2017. There are some concerns, such as the uncertainty surrounding Brexit and the potential raise to power of anti-euro parties in certain countries, but the overall outlook is positive.

Pixabay/Public Domain

Pixabay/Public Domain

In this way, European equities are positively viewed. For example, Invesco says that European valuation, while not cheap, are more attractive relative to the US. It points out that the forward P/E of the MSCI Europe Index stands at around 14.9, which is 20% higher than its 10-year average, but it represents a 20% discount to the US. In addition, European companies have more room to grow in terms of margins and European earnings are expected to grow in the high single digits this year.  Some US investors have said that they are looking closer at European equities. In November, billionaire Ken Fisher said that he is overweight to continental Europe and emerging markets. In an interview on CNBC, Themis Themistocleous, head of UBS’s European Investment Office, also said that in terms of asset allocation, they are overweight on European equities.

To sum up, European stocks look like a promising investment and retail investors should not overlook the signs. Retail investors can get access to European stock markets, but the process is more complicated than buying US stocks. Another way to get exposure to Europe is to invest in US-listed stocks of European companies. With this in mind, we have taken a look at the favorite European stocks among hedge funds and saw that most of them saw significant inflows of capital from smart money investors last year. Looking at the consensus hedge fund sentiment can be useful in identifying stocks that can help smaller investors beat the market, as our research shows. We have developed a strategy that takes into account the top consensus picks among the best-performing hedge funds and this approach showed returns of 74% since May 2014, outperforming the S&P 500 ETF (SPY) by over 20 percentage points. You can take a closer look at our strategy and access the latest picks by accessing our newsletters free of charge for 14 days.

On the next page, we are going to take a closer look at five European stocks that rank as the most popular among the funds in our database and which saw an increase in bullish sentiment over 2017. Also, we excluded companies that were only incorporated in Europe, but had their main offices in the US.