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 9% reaching new all-time highs.¹
Large caps were the main drivers of this rise, gaining almost 10%.² Small³ and mid-caps⁴ performed less well, but still recorded a respectable gain of over 5%. 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-chip stocks.

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.

However, 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, while the UK election campaign had limited impact on the market performance. We do not anticipate that the elections will have a significant impact on the French or European economies. The effect of political instability on the financial markets and a country's economic growth is typically exaggerated. Furthermore, public protests and demonstrations continue, particularly in France. This could result in further disruption and unrest in France, particularly given that the eyes of the world have been on Paris since the end of July for the Summer Olympics. In the worst-case scenario, this could have a slight impact on economic activity for a few weeks, but it would not have a lasting effect.

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 towards 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. The ifo business climate index, for example, has stabilised at just under 90.

Looking ahead

However, 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 June, for example, the S&P 500 was trading at a P/E ratio of 19.7 while its European counterpart, the MSCI EUROPE NET TOTAL RETURN INDEX, was valued more than 30% cheaper at a P/E ratio of 13.2.⁵

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, however, 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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¹MSCI Europe Net Total Return Index: 9.06% for the period from 31 December 2023 to 28 June 2024
² MSCI Europe Large Cap Net Total Return Index: 9.81% for the period from 31 December 2023 to 28 June 2024
³ MSCI Europe Small Cap Net Total Return Index 5.0% for the period from 31 December 2023 to 28 June 2024
⁴ MSCI Europe MID Cap Net Total Return Index: 5.35% over the period from 31 December 2023 to 28 June 2024
⁵ Source: Bloomberg, 28 June 2024, P/E ratio refers to estimated future earnings for next year