After a weak start to the year, the European stock markets had a positive first half of the year.
The broad European equity market rose by over 12.11% reaching new all-time highs.¹
Large caps were the main drivers of this rise, gaining 12,72%.² Small³ and mid-caps⁴ performed less well, but still recorded a respectable gain of about 8%. They thus underperformed the broad equity market, indicating a relative risk aversion on the part of investors.

In uncertain times, they tend to favour the perceived stability and security of blue-chips. Markets were primarily influenced by macroeconomic data. Central banks adopted a cautious approach with interest rate cuts, particularly in the first few months. In the US, the economy demonstrated resilience despite elevated key interest rates. In Europe, on the other hand, inflation remained well above the 2% target despite the economic downturn. However, there was anticipation that the central banks would adjust interest rates in the near future, which gave the markets a positive boost.

Investors experienced a notable setback in June. While the European elections at the beginning of June did not result in any significant changes to the overall composition of the European Parliament, with the EPP remaining the strongest party in the EU Parliament, they did trigger a number of political upheavals at the national level, particularly in France. Macron's sudden decision to dissolve the French parliament on election night and call new elections caused turbulence in French equities and bonds. Leading to a sell-off across European markets. The CAC 40 saw a 6.2% decline in June. The UK election, on the other hand, had only a limited impact on European market developments. We do not expect the elections to have a significant overall impact on the European economy. The impact of political instability on the financial markets and a country's economic growth is generally exaggerated. The same applies to major sporting events such as the Olympic Games or the European Football Championship. In the long term, there is hardly any significant stimulus for the organising nation and the financial markets.

While these challenging circumstances have prompted a cautious approach among investors in European equities in the near term, there are also some encouraging signs. Despite stabilising at a rate well below 3% this year, inflation rates in the eurozone remain significantly higher than the ECB's inflation target of 2%. In June, Christine Lagarde and the ECB made a significant shift in monetary policy, lowering key interest rates by 25 basis points, a move that reversed the trend of the past five years.

Although this was an anticipated move, it was somewhat unconventional, as the ECB has historically tended to align itself the Fed and is now reducing interest rates before the Fed. However, this measure, the ECB's first rate cut in five years, is unlikely to be followed by further monthly rate cuts for the time being, as the ECB's victory in the fight against inflation cannot yet be declared in Europe. Typically, one would anticipate that industrial production and consumer sentiment would reach their lowest point only after several rate cuts. We believe that the significant decline in energy prices has contributed to lowering inflation and alleviating pressure on industry and consumers. The convergence of a shift in the interest rate cycle and indications that the region's economy may now be gaining momentum gives rise to cautious optimism for the European economy and European equity markets.

A short but sharp correction on the markets began just in time for the start of August. The starting point was the Bank of Japan, which raised interest rates to 0.25% from the previous range of 0% to 0.1% and intends to halve its purchases of Japanese government bonds. Purchases of government bonds are to be reduced by around 400 billion yen per quarter. The appreciation of the yen caused a sharp sell-off on the markets, as some institutional investors speculated with carry trades and sent the Nikkei on a downward spiral. The sell-off was exacerbated by concerns about a weakening US economy. The correction came as quickly as the countermovement. The very next day, investors took advantage of the dip and were able to pull the Nikkei back up by almost 10%. This also calmed the other markets, and the stock markets rose throughout August.

Looking ahead

Europe’s currently more moderate economy and falling energy prices should ultimately favour further interest rate cuts by the ECB in the second half of 2024 and beyond, which could lead to an even more pronounced interest rate differential with the US if the Fed does not follow suit. This could be very positive for European equities. Not only do lower interest rates mean that companies can channel savings from lower interest costs into share buybacks, dividends and M&A, but a weak euro also boosts exports.

A look at the European equity markets is certainly worthwhile, as valuations remain very attractive compared to global markets and especially the US market. At the end of August, for example, the S&P 500 was trading at a P/E ratio of 23.4 while its European counterpart, the MSCI EUROPE NET TOTAL RETURN INDEX, was valued more than 33% cheaper at a P/E ratio of 14.8.⁵

Looking across the pond, political uncertainty remains in the second half of the year.
A new US president will be elected in November, which could lead to volatility. Historically, markets tend to bounce back from political shocks once uncertainty subsides and the focus returns to economic fundamentals. Despite the political uncertainty and economic challenges, European equity markets have shown remarkable resilience and growth potential in the first half of the year. The positive trend in inflation rates, the ECB's increasingly proactive monetary policy and the attractive valuation of European equities are strong indicators that the market will continue to perform well as the year progresses.

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¹ MSCI Europe Net Total Return Index: 12.11% for the period from 31st December 2023 to 30. August 2024
² MSCI Europe Large Cap Net Total Return Index: 12.72% for the period from 31st December 2023 to 30th August 2024
³ MSCI Europe Small Cap Net Total Return Index 9.12% for the period from 31st December 2023 to 30th August 2024
⁴ MSCI Europe MID Cap Net Total Return Index: 9.16% over the period from 31st December 2023 to 30th August 2024
⁵ Source: Bloomberg, 30th August 2024, P/E ratio refers to estimated future earnings for next year