February 26, 2025 • 26 mins
European stocks are off to a strong start this year—one of their best ever in fact and easily beating the US market. But can it last? Will US tech stocks come roaring back again? And are there any reasons to invest in Europe besides stocks there just being “cheap?”
On this episode of Trillions, Eric Balchunas and Joel Weber speak with Gina Martin Adams, Bloomberg Intelligence’s chief equity strategist, and Todd Sohn, senior exchange-traded fund and technical strategist at Strategas Securities. They discuss Europe’s fundamentals, the market’s limitations and why it’s outperforming now.
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Speaker 1 (00:06):
Organize trains.
Speaker 2 (00:07):
I'm Joel Webber and I'm Eric Belchernes.
Speaker 1 (00:12):
So we spent last episode talking about why the US
is so great? Yeah, is there a contrarian take that
we should visit today?
Speaker 3 (00:21):
Yeah, so a couple things.
Speaker 2 (00:23):
First of all, yes, I still think the US has
some elements that are special. But this year so far, Joel, Europe,
which a lot of times gets dumped on narratively, it's,
you know, been in the doghouse for years. It's basically
tripling the S and P five hundred. This year it's
up nine ten S and p's up two point four percent.
You know, will it last or is another head fake?
(00:44):
I think it's a good time to give Europe at
least a strong case. You know, we were a little
negative last time, and I thought, you know, it would
be a good time to look at the other side
of the story and maybe there is a reason to
allocate there. We have on our team, in the broader
strategy team, there has been some research and data that
(01:05):
indicates it might actually be for real this time, and
I thought we should share all that, get it on
the table, and then the listener can can decide.
Speaker 3 (01:13):
We'll let them be the jury.
Speaker 1 (01:14):
Okay, so joining us, we're going to have your boss,
Gina Martin Adams, who's the chief equity strategist at Bloomberger Intelligence,
as well as Todd Son, who's the senior ETF and
technical strategist at Stratigis Securities, this time on Trian's the
case for Europe. Todd, Gina, welcome to Trillions.
Speaker 4 (01:37):
Thank you, thank you for having us.
Speaker 5 (01:39):
Great to be here with you guys.
Speaker 2 (01:40):
Quick note here, Todd is such a trooper that he
is doing this from LaGuardia Airport in the pet relief Stagia.
If that's the first, and that is a first. So
if you hear any little background noise, that's why. And
if a dog peas on his leg, we promised we'll
let him re record that part. Okay, so just fy,
Thank you Todd for being a so dedicated eric.
Speaker 1 (02:03):
I want to start with just what is the data
when you guys are assessing something like this, What are
you looking at beyond just indexes?
Speaker 2 (02:12):
Right? So, one of the things that has been apparent
for a while is evaluations. Right in the US, the
average price to earnings ratio is very high.
Speaker 3 (02:22):
In Europe it's lower.
Speaker 2 (02:23):
That gap is pretty much I think at historical records, right,
So that's the data we would look at now. We
only we don't maybe go more than a couple feet
deep in the ETF world, but I work with people
who go deep into the number. So Gina has put
out some reports recently that talk about the weakness in
the US and ipso facto a little strength in Europe.
(02:45):
And then Todd put out a note that I read about,
I don't know three months ago where he said, I
think he called the case for Europe, but his thesis
was it can't get worse, which I thought, what an
investment thesis is, Hey, come invest here, it can't get
much worse. Anyway, that's sort of the state of Europe.
So I think we start with Geno with just you know,
(03:08):
the US weakness maybe and how that relates to Europe
maybe having some good signs.
Speaker 4 (03:14):
Yeah, and it's very much the same the same case,
just in the polar opposite that you just made, where
Europe by November of last year was training at an
all time historic discount relative to the rest of the world.
The US was training at its PreK peak relative to
the rest of the world valuation premium. So the US
case the anti US case is really the opposite of
(03:37):
the pro Europe case when it comes to valuations. At
the same time, you have to work through the mental
gymnastics of what that really means, and what that really
means is expectations for the US going into twenty twenty
five were extremely high, whereas expectations for Europe are extremely low,
and momentum shifts in global stocks oftentimes occur because of
(03:58):
expectation extremes. There's almost no chance that the expectations embedded
in US stock prices can be met by US companies,
at least in the short term, and you have that
adjustment process that emerges, and we've seen that play out
real time through earning season, in particular with tech, where
suddenly we have competitives, competitors in the tech space that
no one thought it would exist three months ago. That
(04:21):
creates a very different environment for tech and for the US,
whereas for Europe there was no expectation for growth and
suddenly earnings estimate stopped falling. So it wasn't a fantastic
evolution of great news for Europe, but expectations were solow
they couldn't get much worse. And then we have decent
earnings come through, You've got the Central Bank still easying,
(04:42):
You've got some relief in terms of political pressure that
has emerged over the weekend with Germany, and that's been
enough to get a little bit of momentum moving in
the favor of Europe.
Speaker 1 (04:51):
Can I say this differently and see how you react
to it? Is the US the ultimate growth story and
Europe is the ultimate value story?
Speaker 4 (05:00):
Yes, I think that's a lot of what we're seeing
is also the US is the ultimate tech story and
Europe is in some cases the ultimate financial story. So
it's a growth value expectations dichotomy and sector performance diconomy
that creates an opportunity for Europe and probably puts the
(05:23):
US behind rest of the world at least in the short.
Speaker 3 (05:26):
Rund Let's go ahead and bring you in.
Speaker 1 (05:28):
What did you see as you were working on on
your thesis?
Speaker 6 (05:34):
So I agree with Gina about low expectations, and to me,
it's all about sentiment as well. And one of the
funny ways I think I can sum up European ETFs
listening in the US is there's fifty ETFs, both combined
of the region as well as single country, and they
have about fifty seven billion assets, and keep in mind
(05:55):
the who've been around for about twenty five years or so.
Speaker 5 (05:59):
Take that in comparison.
Speaker 6 (06:00):
Relative to the ey Shares Bitcoin ETF, which has only
been around for about thirteen months, and that has the
same amount of assets. So along with the lines, if
it can't get any worse, we're talking about a newer
aspect class. It's the same amount of assets as what
is a cornerstone of investor portfolios for international and I
think along with just assets under management, you look at
(06:20):
product launches, issuers have given up on the space. There's
only been two European ETFs launched over the last six years,
and they're both very thematic, focused on luxury goods and
aerospace and defense. So I like that there's this apathy
from issuers. They're not really focusing on the region. I
think that's really interesting from an expectations and sentiment standpoint.
Speaker 2 (06:47):
So Europe is having this nice pop, I'll call it
right up ten percent. That's a lot for Europe, but
the flows are not there. Normally, you know, you have
a little run, the flows will follow, at least some
models will go in. But there's there's been about just
shy of a billion dollars into European ETFs from US
investors this year. Now that compares to about eighty billion
that have just pumped into US equities as usual. My
(07:09):
thesis is that it would take six to nine months
to kind of overcome the feeling that we've seen this
movie before, or I call it a short film, where
it's two months of Europe and then all of a sudden,
the cues like a runaway bus just like runs over
Europe once again. And that's happened like ten times, and
(07:30):
so I understand the Pavlovian response to like not do
anything and just wait for the cues to come back.
Do you think this has legs basically? And do you
think that's when investors might actually turn around?
Speaker 1 (07:40):
I love comparing this to short films, which is like
its own category in the Oscars, but like, did you
watch it?
Speaker 4 (07:45):
Not?
Speaker 5 (07:45):
Really?
Speaker 4 (07:46):
I think that's the best picture, right, Yes, But I
think we need to think about how we measure the legs. Right,
there's a very distinct possibility that Europe gathers legs without
the ETF universe recognizing it. Because the biggest investor in
Europe is the European investor, and that's where you saw
the biggest flight from Europe occur is Europe. For Europe
(08:08):
was no longer a thing by twenty twenty four. So
I think first you probably get direct investments from Europe
in Europe. Some of that is a real nationalistic sentiment
that could emerge as a result of the political environment.
Some of it is a currency play, some of it
is a financial play as a result of the ECB.
But we may not actually see US investors contribute to
(08:32):
the European story in the form of flows in the
ETF landscape, and that we could still see Europe outperform.
I would agree to get the US investor interested in Europe.
It is a much much bigger hurdle. The US investor
is very isolated in their strategy. They think that all
they need to own is the US. The US is
the best way to invest in the globe. Is a
(08:54):
lot of the rhetoric that you hear from the US
investor base that theory will have to get dismantled through
several months, if not several quarters, maybe even several years
of evidence before the US investor capitulates and says I'm
going to fly into Europe. I'm gonna buy a bunch
of europe as an opportunity just is very unlikely it
could emerge. This is something that's very unique to this situation.
(09:17):
In a world where we have deglobalization as a centralized theme,
US companies will potentially have less access to the rest
of the world, will become much more isolated as inherent entities.
And if that's the case, then suddenly this thesis that
you can only invest in the US, you only need
to invest in the US in order to access global
(09:37):
markets really starts to go away. But that's a really
long term, long tail, secular possibility. It's not likely to
emerge in the next month or two.
Speaker 2 (09:46):
And just to give some data behind that, Athnoscios on
my team Ransom numbers and the percent the last couple
of years, a lot of people overseas have invested in
the US. That's helped the markets. Europe, though the percentage
in in the US has plummeted this year, so they
are the ones driving this rally. But elsewhere in the
world it's still gone up. People like Asia still buying
(10:08):
the US, US still buy in the US. So it
is interesting. I have this narrative thing that I think
and narratives matter. I think they can change price can
change narrative, so if it goes up enough, then narrative
could be broken. But I think most people sit there
and think, well, look, yeah, maybe there's a mean reversion
trade here, but long term there's more growth in the US.
(10:31):
People here work crazy hours. You know. I wrote a
note about Jack Bogel, who said you don't need international
and he got more savage as he got older, and
here's what he's One of the lines he said was,
you know, everyone says I'm wrong. I said, for a
lot of reasons, you don't need an international and he
says something here, the third largest country in IFA is France.
Speaker 3 (10:51):
The soul of hard work. He can't see.
Speaker 2 (10:54):
I can't see that I'd make more money in Britain
or Japan, YadA YadA, or France where they could and
pass the law saying you had to work thirty five
hours a week. And I think generally Americans are like
in Europe, everyone's at the cafe at three o'clock. Yeah,
the companies actually run, but it's just just to get
enough done to not like go to hell. And I
(11:15):
think in the US it's everyone is in such fierce competition,
you get all this, all these flowers blossom in the
forms of new companies and growth and opportunity. How true
is that narrative and how hard will that be to
a race?
Speaker 3 (11:28):
I think it's pretty true.
Speaker 4 (11:30):
Frankly, though, I go back to my thesis that a
lot of that narrative also is about globalization. In the
era of globalization, where the US was becoming this global hegemon,
where the US was driving activity, where US corporates were
constantly seeking international locations for the destination of their products,
where they had a tremendous global dominance. Of course, the
(11:54):
US companies were more productive. At the same time, You're
absolutely right, the ructural landscape, the policy landscape in Europe
became less and less productive, more and more government interventionist.
I think you're at a moment now where Europe is
starting to recognize that, in particular in Germany. We saw
it very, very profoundly over the course of the last
(12:16):
year in Germany. The Germans themselves are recognizing that they're
taking a back seat economically and financially to the rest
of the world, and there's a lot of frustration there.
So I think there's a potential rallying moment for Europe
to think about privatization, think about ways to enhance productivity,
think frankly about how to form global relationships outside of
(12:37):
their relationship with the US. So you could make a
case that as Germany becomes tighter with China, for example,
as Germany seeks other markets to enhance his productivity and
global presence, you could see some pretty big sea changes
in Europe. The other thing that I would say that's
so fascinating to me with respect to Europe right now
(13:00):
is the countries in Europe that went through a reckoning
moment in the European debt crisis. Now, I know that
this is a long time ago. Not a lot of
us remember twenty eleven, but it was a big moment
in time for Europe, but only for the debt laden
what we called at the time pigs economies Portugal, Ireland, Italy,
Greece and Spain. Those economies have transitioned remarkably over the
(13:25):
course of the last decade in change. Those are the
areas of Europe that are starting to outperform most profoundly.
The best performing markets in Europe this year are Spain, Italy, Switzerland,
to a lesser degree. Germany certainly is participating, but where
did Spain and Italy come from? That comes from a
legacy of change, right, And in the European debt crisis,
they had a moment of reckoning, they had to write
(13:47):
size spending, they had to think about structural changes. Many
of those appear to have been enacted, and the economic
optimism in those peripheral economies is significantly greater than some
of the other legacy economies, like you is the example
of France or even Germany. So I think that, you know,
Europe is a conglomeration of countries and that's something that
(14:07):
we need to keep in mind as well. Europe has
one big entity, maybe not as investible as some of
these other smaller country markets that have been doing very
well over the course of the last year or so.
Speaker 1 (14:19):
But to Ton's point earlier, there's like a dearth of products,
Like Todd, is there a big opportunity here to like
actually bring you know, some innovation and ETFs to this space.
Speaker 6 (14:30):
So I totally agree with what Gene is saying about
the countries are changing, right how they function, and I
think this is where there is opportunity for active managers, right,
It's nearly impossible based on data to outperform US large
cap growth, but because Europe has struggled in terms of
performance for so long, I wonder if you're you have
(14:54):
an opportunity for active Europe. Not just active developed markets
because those are already just out there, but the there
are no active, straightforward European products, and I think those
managers can find, you know, the winners of this change
that's going on there. I do think it's really interesting
the constituency of Europe and ETFs are changing. They were
(15:17):
typically very financials heavy and that's still true, but consumer
staples influence in the Europe and ETFs has really dropped.
Speaker 5 (15:24):
Over the last few years, and now you're seeing more.
Speaker 6 (15:27):
Industrials take control and as well as technology, and SAP.
Speaker 5 (15:32):
On a given day is the largest weight in Europe.
I'm not sure how many people know that.
Speaker 6 (15:35):
If you put fifty people in a room, they might
guess it's a financial or a healthcare type of company,
but it's SAP and then there's ASML.
Speaker 5 (15:43):
So I like that there's this change.
Speaker 6 (15:45):
Going on and the way we invest in Europe, and
I do believe it also speaks to where actives should
focus in terms of ETF.
Speaker 2 (15:51):
For Shures Todd, one more question for you is what
I've found as an ETF anaist over the years is
when it comes to emerging market countries and even developed
market countries, a lot of the money that would go
into say VGK, which is the larger Europe, is retail
and that's the money that's not biting right now. However,
if you take UK or France or Germany, there is
(16:11):
you know, about a billion in each of these single
country ETFs. But they tend to be used by traders
who are usually betting ahead of an election, and so
a lot of times, like the Brazil ETF comes to mind,
if there's some kind of a big event coming up
that's geopolitical, a lot of times you'll see flows Russian
ahead of that and they'll kind of it's almost like
(16:33):
a geopolitical sports book. They're like, I really think UK
is going to bounce with this election or this situation.
Do you think that is what we need to see
first is a couple traders get excited with the single
country ETFs, and then retail will follow with the sort
of bigger, broader ones later.
Speaker 6 (16:51):
I think so that makes sense, and I'm not even
sure about retail, but I'm more so looking at the
model providers right so you can look at JP Morgan,
you can look at State Street and see what their
allocations are to Europe as well, and I don't see
much going on there right now.
Speaker 5 (17:08):
So I think this is the great part about ETFs,
as that was mentioned.
Speaker 6 (17:11):
You can place a bet on an event, outcome, election,
whatever it might be. But I don't know if Europe,
if retail, will follow along or not. It's just it's
not sexy enough. It's not leverage, it's not a reconductor.
I mean, what about two x pigs? Does that start
to get who reason? Does that start to get spicy?
And then Europe you can go through.
Speaker 3 (17:32):
Put two x on anything and you'll get a couple
of bytes.
Speaker 5 (17:36):
I boil it down to Okay, we'll retail come back.
I don't know.
Speaker 6 (17:39):
And then when do the models start coming back to
overweight Europe? And I'm just not sure we're anywhere near
there yet. It will take far more outperformance for that
to continue.
Speaker 2 (17:49):
And I have a question for you, Gina, does Europe
even have tech? I mean, you know, you think I
looked at the best performers in Europe, the financials have
driven it. They're up fourteen percent. But I'm looking at
the performers. I don't really see any tech e. Is
there even a europe Tech ETF. I mean not sure
if one exists, Todd would know real quick.
Speaker 5 (18:07):
Uh it's almost like a.
Speaker 3 (18:14):
Military intelligence.
Speaker 6 (18:15):
Yeah.
Speaker 4 (18:15):
There was one play in Europe with a semiconductor wave
and that was asml in uh U have SaaS out
of Germany, but these are not This is a very
small component of the European broader market and that's the
biggest reason I would suggest why Europe underperformed the last
two years is there just isn't a lot of tech,
(18:35):
and tech was the area of growth opportunity. It was
the area that led global indices, not just the US,
but global markets with the most tech exposure outperformed. Aka
Taiwan was a huge outperformer. So that legacy of limited
tech is a big part of the story for why
(18:55):
Europe was not performing. Now it's helping because tech dropped.
It was the only sector in the US that dropped
in January. You know, it's not been performing well so
far this year as investors are rotating into other opportunities
and tech has proven to be a bit of a laggard.
Speaker 1 (19:10):
This really does feel like to bring it back to
that growth versus value thing, it's like growth will run
away with everything and then every once in a while.
Speaker 3 (19:18):
Yeah, every decade, Yeah, value will show up and yeah.
Speaker 4 (19:21):
Well, if you look at the long term, when did
Europe actually outperform for an enduring period of time. It
was in the two thousand and one to two thousand
and seven period when tech took a backseat to everything.
Tech was kind of there, but not outperforming everything, not
leading markets. We had a commodities boom, we had a
financial sector boom through a lending cycle. Those are the
type of that's the type of environment in which Europe
(19:42):
will outperform inevitably because of constituent bias and concentration.
Speaker 2 (19:53):
One question, if you're somebody who has a large chunk
of your equity allocation in US ETFs, would you would
it make more sense just rotate to international and have
some Asia in there, or maybe just do Asia. How
does Europe compare to other regions relative to the US
in terms of this like possibly having a moment coming up.
Speaker 4 (20:14):
Yeah, it's very interesting because China has actually performed very
very well so far this year, But India has been
officially in a bear market, so Asia is in the
eye of the beholder. What do you mean by Asia?
I have to say because if you think of Asia
as China, then it does appear that opportunities are emerging
in China, particularly now that we have tech plays emerging
(20:35):
as a potential competitor to the US. But Asia is
a very mixed bag because India is in a bear
market now, and we have to acknowledge that India had
some unique structural issues as well that elevated prices there
even as much as they were elevated in the US,
and now India is taking a back seat. So Asia's
a bit of a mixed bag. When you look at
(20:57):
Latin America, you also have a really mixed view between
Brazil and Mexico. Emerging markets in the Middle East and
Africa stand out for US as an opportunity, but the
investibility of that region is hugely, hugely questionable. How do
you even get access to that region, how do you
put money to work in that region? But that does
appear to be a region of the world where emerging
(21:18):
opportunities are huge. Yeah, definitely helps Japan and Australia are
areas of the world we haven't talked about. So if
you want to talk developed market, Asia, Japan and Australia
are two totally different markets. Japan is also in a
bit of a slump after leading along with the tech
wave until the middle of last year, and Australia is
(21:39):
a very commodity sensitive sector. So it depends on what
your thesis is. These are all very very different markets.
But right now, yeah, Europe kind of stands out relative
to the rest, mostly because of that valuation discount.
Speaker 2 (21:53):
And can we talk about the currency real quick, because
Todd is old enough to remember, like I am the
about ten years ago, these currency GTFP like we're like
rock stars. So HGDJ was the big one heads Europe.
That one's up twelve percent this year, so two percent
better than regular Europe.
Speaker 3 (22:09):
What about that?
Speaker 2 (22:09):
Could yeah, could a strong dollar actually maybe bring people
in back to that currency heads trade?
Speaker 4 (22:16):
Yeah? Yes, currencies are a big theme for us this year.
We've been focusing a little bit more on the en
than anything else. The en, you know, it is typically
a very risk off signal. The yen performing very well
would suggest that we're maybe some of our optimistic assumptions
regarding global equity performance should be questioned. But with respect
(22:37):
to Europe, there are quite a few people who suggest
that it was really the dollar rip that ultimately created
the downside for Europe and the second part of the
latter part of last year, because as the dollar was ripping,
the euro was the predominant downside risk that plays its
way through earnings in the short run in a very
very negative way. So we saw massive negative earnings or
(22:58):
vision momentums when the dollar was at its biggest rip
or it's biggest gaining at the point in which it
was gaining the most. Now we're seeing a little bit
of normalization there and that may be helping Europe. But generally,
if the euro gets cheaper, that's great for European exporters,
and a lot of these developed market European groups are
(23:20):
very sensitive to European exports. So if you get a
combination of China's growth improving and the Euro getting cheaper,
that's usually a pretty good sign that we're going to
get some earnings momentum emerging in Europe, and that may
be starting to price in.
Speaker 6 (23:34):
For the less sophisticated folks out there who listen. I'm
always a fan of the fifty to fifty allocation fifty
hedge fifty unhedged.
Speaker 5 (23:43):
Just because it's so hard to get a market right
and then get the FX right of it. And I
wonder if that's just the water down version of trying
to play Europe or international and there's ets for that.
So I like the fifty to fifty aspect.
Speaker 1 (23:56):
Okay, so just speaking of ETFs for that, I thought
what you said arelier about this being a great opportunity
for active investors potentially if you could put together that
three X pigs or what have you.
Speaker 5 (24:08):
What what would you.
Speaker 1 (24:09):
Want this to look like for Europe if you could,
if you could get go into Europe and have exactly
what you want, what would it look like?
Speaker 5 (24:16):
Well, I like to defend the industrial names.
Speaker 6 (24:19):
I think you have to have some of the those
European tech because they've been a beneficiary of this.
Speaker 2 (24:23):
Yeah and sorry.
Speaker 5 (24:29):
Sorry too, s A P A, s M A, s
M L. And then the financials.
Speaker 6 (24:36):
This is the first time I can remember that they're
actually leading and not causing a problem.
Speaker 5 (24:40):
I think this is amazing that we have.
Speaker 6 (24:41):
European financials are just stuck and higher, and I think
if you're really going to have an issue, whether it's
within Europe or within the global economy, you'll start to
see those names and their credit backdrop really deteriorate.
Speaker 5 (24:53):
I'm sure Gina will be on top of that as well.
Speaker 6 (24:56):
The European Financial eu f N, I think it's about
to hit new all time high. Eric's that's a long
time coming.
Speaker 5 (25:03):
Historic.
Speaker 3 (25:04):
By the way, there is a three x europe BTF.
Speaker 2 (25:06):
There you go get some guts so much an assets
it has, Todd, Oh.
Speaker 5 (25:11):
God, I don't even I don't even know what the
ticker is, to be honest.
Speaker 2 (25:13):
It's b u r L twenty two million, which is
really small. That means no one cares, there's no juice.
Speaker 5 (25:21):
No, but this is this is part of the argument.
Speaker 2 (25:23):
But if you're a pops like this, one's up thirty
percent this year because it's cripple Europe need more though,
But you got some of these single stocky tips go
up thirty percent a day.
Speaker 3 (25:32):
So this is just like child's play at this point.
Speaker 1 (25:35):
All right, well we we have the thing that we
can watch now, uh Todd. Gina, thanks so much for
joining us on trillions.
Speaker 4 (25:41):
Thank you for having us, Thank you very much.
Speaker 7 (25:48):
Thanks for listening. To Trillions until next time. You can
find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify.
Speaker 5 (25:57):
Or wherever else you'd like to listen.
Speaker 1 (25:59):
We'd love to hear from you. We're on Twitter. I'm
at Joel Webber Show. He's at Eric Waulchuna's.
Speaker 7 (26:06):
This episode of Trillion's was produced by Magnus Hendrickson. Bye
Organize trains.
Speaker 2 (00:07):
I'm Joel Webber and I'm Eric Belchernes.
Speaker 1 (00:12):
So we spent last episode talking about why the US
is so great? Yeah, is there a contrarian take that
we should visit today?
Speaker 3 (00:21):
Yeah, so a couple things.
Speaker 2 (00:23):
First of all, yes, I still think the US has
some elements that are special. But this year so far, Joel, Europe,
which a lot of times gets dumped on narratively, it's,
you know, been in the doghouse for years. It's basically
tripling the S and P five hundred. This year it's
up nine ten S and p's up two point four percent.
You know, will it last or is another head fake?
(00:44):
I think it's a good time to give Europe at
least a strong case. You know, we were a little
negative last time, and I thought, you know, it would
be a good time to look at the other side
of the story and maybe there is a reason to
allocate there. We have on our team, in the broader
strategy team, there has been some research and data that
(01:05):
indicates it might actually be for real this time, and
I thought we should share all that, get it on
the table, and then the listener can can decide.
Speaker 3 (01:13):
We'll let them be the jury.
Speaker 1 (01:14):
Okay, so joining us, we're going to have your boss,
Gina Martin Adams, who's the chief equity strategist at Bloomberger Intelligence,
as well as Todd Son, who's the senior ETF and
technical strategist at Stratigis Securities, this time on Trian's the
case for Europe. Todd, Gina, welcome to Trillions.
Speaker 4 (01:37):
Thank you, thank you for having us.
Speaker 5 (01:39):
Great to be here with you guys.
Speaker 2 (01:40):
Quick note here, Todd is such a trooper that he
is doing this from LaGuardia Airport in the pet relief Stagia.
If that's the first, and that is a first. So
if you hear any little background noise, that's why. And
if a dog peas on his leg, we promised we'll
let him re record that part. Okay, so just fy,
Thank you Todd for being a so dedicated eric.
Speaker 1 (02:03):
I want to start with just what is the data
when you guys are assessing something like this, What are
you looking at beyond just indexes?
Speaker 2 (02:12):
Right? So, one of the things that has been apparent
for a while is evaluations. Right in the US, the
average price to earnings ratio is very high.
Speaker 3 (02:22):
In Europe it's lower.
Speaker 2 (02:23):
That gap is pretty much I think at historical records, right,
So that's the data we would look at now. We
only we don't maybe go more than a couple feet
deep in the ETF world, but I work with people
who go deep into the number. So Gina has put
out some reports recently that talk about the weakness in
the US and ipso facto a little strength in Europe.
(02:45):
And then Todd put out a note that I read about,
I don't know three months ago where he said, I
think he called the case for Europe, but his thesis
was it can't get worse, which I thought, what an
investment thesis is, Hey, come invest here, it can't get
much worse. Anyway, that's sort of the state of Europe.
So I think we start with Geno with just you know,
(03:08):
the US weakness maybe and how that relates to Europe
maybe having some good signs.
Speaker 4 (03:14):
Yeah, and it's very much the same the same case,
just in the polar opposite that you just made, where
Europe by November of last year was training at an
all time historic discount relative to the rest of the world.
The US was training at its PreK peak relative to
the rest of the world valuation premium. So the US
case the anti US case is really the opposite of
(03:37):
the pro Europe case when it comes to valuations. At
the same time, you have to work through the mental
gymnastics of what that really means, and what that really
means is expectations for the US going into twenty twenty
five were extremely high, whereas expectations for Europe are extremely low,
and momentum shifts in global stocks oftentimes occur because of
(03:58):
expectation extremes. There's almost no chance that the expectations embedded
in US stock prices can be met by US companies,
at least in the short term, and you have that
adjustment process that emerges, and we've seen that play out
real time through earning season, in particular with tech, where
suddenly we have competitives, competitors in the tech space that
no one thought it would exist three months ago. That
(04:21):
creates a very different environment for tech and for the US,
whereas for Europe there was no expectation for growth and
suddenly earnings estimate stopped falling. So it wasn't a fantastic
evolution of great news for Europe, but expectations were solow
they couldn't get much worse. And then we have decent
earnings come through, You've got the Central Bank still easying,
(04:42):
You've got some relief in terms of political pressure that
has emerged over the weekend with Germany, and that's been
enough to get a little bit of momentum moving in
the favor of Europe.
Speaker 1 (04:51):
Can I say this differently and see how you react
to it? Is the US the ultimate growth story and
Europe is the ultimate value story?
Speaker 4 (05:00):
Yes, I think that's a lot of what we're seeing
is also the US is the ultimate tech story and
Europe is in some cases the ultimate financial story. So
it's a growth value expectations dichotomy and sector performance diconomy
that creates an opportunity for Europe and probably puts the
(05:23):
US behind rest of the world at least in the short.
Speaker 3 (05:26):
Rund Let's go ahead and bring you in.
Speaker 1 (05:28):
What did you see as you were working on on
your thesis?
Speaker 6 (05:34):
So I agree with Gina about low expectations, and to me,
it's all about sentiment as well. And one of the
funny ways I think I can sum up European ETFs
listening in the US is there's fifty ETFs, both combined
of the region as well as single country, and they
have about fifty seven billion assets, and keep in mind
(05:55):
the who've been around for about twenty five years or so.
Speaker 5 (05:59):
Take that in comparison.
Speaker 6 (06:00):
Relative to the ey Shares Bitcoin ETF, which has only
been around for about thirteen months, and that has the
same amount of assets. So along with the lines, if
it can't get any worse, we're talking about a newer
aspect class. It's the same amount of assets as what
is a cornerstone of investor portfolios for international and I
think along with just assets under management, you look at
(06:20):
product launches, issuers have given up on the space. There's
only been two European ETFs launched over the last six years,
and they're both very thematic, focused on luxury goods and
aerospace and defense. So I like that there's this apathy
from issuers. They're not really focusing on the region. I
think that's really interesting from an expectations and sentiment standpoint.
Speaker 2 (06:47):
So Europe is having this nice pop, I'll call it
right up ten percent. That's a lot for Europe, but
the flows are not there. Normally, you know, you have
a little run, the flows will follow, at least some
models will go in. But there's there's been about just
shy of a billion dollars into European ETFs from US
investors this year. Now that compares to about eighty billion
that have just pumped into US equities as usual. My
(07:09):
thesis is that it would take six to nine months
to kind of overcome the feeling that we've seen this
movie before, or I call it a short film, where
it's two months of Europe and then all of a sudden,
the cues like a runaway bus just like runs over
Europe once again. And that's happened like ten times, and
(07:30):
so I understand the Pavlovian response to like not do
anything and just wait for the cues to come back.
Do you think this has legs basically? And do you
think that's when investors might actually turn around?
Speaker 1 (07:40):
I love comparing this to short films, which is like
its own category in the Oscars, but like, did you
watch it?
Speaker 4 (07:45):
Not?
Speaker 5 (07:45):
Really?
Speaker 4 (07:46):
I think that's the best picture, right, Yes, But I
think we need to think about how we measure the legs. Right,
there's a very distinct possibility that Europe gathers legs without
the ETF universe recognizing it. Because the biggest investor in
Europe is the European investor, and that's where you saw
the biggest flight from Europe occur is Europe. For Europe
(08:08):
was no longer a thing by twenty twenty four. So
I think first you probably get direct investments from Europe
in Europe. Some of that is a real nationalistic sentiment
that could emerge as a result of the political environment.
Some of it is a currency play, some of it
is a financial play as a result of the ECB.
But we may not actually see US investors contribute to
(08:32):
the European story in the form of flows in the
ETF landscape, and that we could still see Europe outperform.
I would agree to get the US investor interested in Europe.
It is a much much bigger hurdle. The US investor
is very isolated in their strategy. They think that all
they need to own is the US. The US is
the best way to invest in the globe. Is a
(08:54):
lot of the rhetoric that you hear from the US
investor base that theory will have to get dismantled through
several months, if not several quarters, maybe even several years
of evidence before the US investor capitulates and says I'm
going to fly into Europe. I'm gonna buy a bunch
of europe as an opportunity just is very unlikely it
could emerge. This is something that's very unique to this situation.
(09:17):
In a world where we have deglobalization as a centralized theme,
US companies will potentially have less access to the rest
of the world, will become much more isolated as inherent entities.
And if that's the case, then suddenly this thesis that
you can only invest in the US, you only need
to invest in the US in order to access global
(09:37):
markets really starts to go away. But that's a really
long term, long tail, secular possibility. It's not likely to
emerge in the next month or two.
Speaker 2 (09:46):
And just to give some data behind that, Athnoscios on
my team Ransom numbers and the percent the last couple
of years, a lot of people overseas have invested in
the US. That's helped the markets. Europe, though the percentage
in in the US has plummeted this year, so they
are the ones driving this rally. But elsewhere in the
world it's still gone up. People like Asia still buying
(10:08):
the US, US still buy in the US. So it
is interesting. I have this narrative thing that I think
and narratives matter. I think they can change price can
change narrative, so if it goes up enough, then narrative
could be broken. But I think most people sit there
and think, well, look, yeah, maybe there's a mean reversion
trade here, but long term there's more growth in the US.
(10:31):
People here work crazy hours. You know. I wrote a
note about Jack Bogel, who said you don't need international
and he got more savage as he got older, and
here's what he's One of the lines he said was,
you know, everyone says I'm wrong. I said, for a
lot of reasons, you don't need an international and he
says something here, the third largest country in IFA is France.
Speaker 3 (10:51):
The soul of hard work. He can't see.
Speaker 2 (10:54):
I can't see that I'd make more money in Britain
or Japan, YadA YadA, or France where they could and
pass the law saying you had to work thirty five
hours a week. And I think generally Americans are like
in Europe, everyone's at the cafe at three o'clock. Yeah,
the companies actually run, but it's just just to get
enough done to not like go to hell. And I
(11:15):
think in the US it's everyone is in such fierce competition,
you get all this, all these flowers blossom in the
forms of new companies and growth and opportunity. How true
is that narrative and how hard will that be to
a race?
Speaker 3 (11:28):
I think it's pretty true.
Speaker 4 (11:30):
Frankly, though, I go back to my thesis that a
lot of that narrative also is about globalization. In the
era of globalization, where the US was becoming this global hegemon,
where the US was driving activity, where US corporates were
constantly seeking international locations for the destination of their products,
where they had a tremendous global dominance. Of course, the
(11:54):
US companies were more productive. At the same time, You're
absolutely right, the ructural landscape, the policy landscape in Europe
became less and less productive, more and more government interventionist.
I think you're at a moment now where Europe is
starting to recognize that, in particular in Germany. We saw
it very, very profoundly over the course of the last
(12:16):
year in Germany. The Germans themselves are recognizing that they're
taking a back seat economically and financially to the rest
of the world, and there's a lot of frustration there.
So I think there's a potential rallying moment for Europe
to think about privatization, think about ways to enhance productivity,
think frankly about how to form global relationships outside of
(12:37):
their relationship with the US. So you could make a
case that as Germany becomes tighter with China, for example,
as Germany seeks other markets to enhance his productivity and
global presence, you could see some pretty big sea changes
in Europe. The other thing that I would say that's
so fascinating to me with respect to Europe right now
(13:00):
is the countries in Europe that went through a reckoning
moment in the European debt crisis. Now, I know that
this is a long time ago. Not a lot of
us remember twenty eleven, but it was a big moment
in time for Europe, but only for the debt laden
what we called at the time pigs economies Portugal, Ireland, Italy,
Greece and Spain. Those economies have transitioned remarkably over the
(13:25):
course of the last decade in change. Those are the
areas of Europe that are starting to outperform most profoundly.
The best performing markets in Europe this year are Spain, Italy, Switzerland,
to a lesser degree. Germany certainly is participating, but where
did Spain and Italy come from? That comes from a
legacy of change, right, And in the European debt crisis,
they had a moment of reckoning, they had to write
(13:47):
size spending, they had to think about structural changes. Many
of those appear to have been enacted, and the economic
optimism in those peripheral economies is significantly greater than some
of the other legacy economies, like you is the example
of France or even Germany. So I think that, you know,
Europe is a conglomeration of countries and that's something that
(14:07):
we need to keep in mind as well. Europe has
one big entity, maybe not as investible as some of
these other smaller country markets that have been doing very
well over the course of the last year or so.
Speaker 1 (14:19):
But to Ton's point earlier, there's like a dearth of products,
Like Todd, is there a big opportunity here to like
actually bring you know, some innovation and ETFs to this space.
Speaker 6 (14:30):
So I totally agree with what Gene is saying about
the countries are changing, right how they function, and I
think this is where there is opportunity for active managers, right,
It's nearly impossible based on data to outperform US large
cap growth, but because Europe has struggled in terms of
performance for so long, I wonder if you're you have
(14:54):
an opportunity for active Europe. Not just active developed markets
because those are already just out there, but the there
are no active, straightforward European products, and I think those
managers can find, you know, the winners of this change
that's going on there. I do think it's really interesting
the constituency of Europe and ETFs are changing. They were
(15:17):
typically very financials heavy and that's still true, but consumer
staples influence in the Europe and ETFs has really dropped.
Speaker 5 (15:24):
Over the last few years, and now you're seeing more.
Speaker 6 (15:27):
Industrials take control and as well as technology, and SAP.
Speaker 5 (15:32):
On a given day is the largest weight in Europe.
I'm not sure how many people know that.
Speaker 6 (15:35):
If you put fifty people in a room, they might
guess it's a financial or a healthcare type of company,
but it's SAP and then there's ASML.
Speaker 5 (15:43):
So I like that there's this change.
Speaker 6 (15:45):
Going on and the way we invest in Europe, and
I do believe it also speaks to where actives should
focus in terms of ETF.
Speaker 2 (15:51):
For Shures Todd, one more question for you is what
I've found as an ETF anaist over the years is
when it comes to emerging market countries and even developed
market countries, a lot of the money that would go
into say VGK, which is the larger Europe, is retail
and that's the money that's not biting right now. However,
if you take UK or France or Germany, there is
(16:11):
you know, about a billion in each of these single
country ETFs. But they tend to be used by traders
who are usually betting ahead of an election, and so
a lot of times, like the Brazil ETF comes to mind,
if there's some kind of a big event coming up
that's geopolitical, a lot of times you'll see flows Russian
ahead of that and they'll kind of it's almost like
(16:33):
a geopolitical sports book. They're like, I really think UK
is going to bounce with this election or this situation.
Do you think that is what we need to see
first is a couple traders get excited with the single
country ETFs, and then retail will follow with the sort
of bigger, broader ones later.
Speaker 6 (16:51):
I think so that makes sense, and I'm not even
sure about retail, but I'm more so looking at the
model providers right so you can look at JP Morgan,
you can look at State Street and see what their
allocations are to Europe as well, and I don't see
much going on there right now.
Speaker 5 (17:08):
So I think this is the great part about ETFs,
as that was mentioned.
Speaker 6 (17:11):
You can place a bet on an event, outcome, election,
whatever it might be. But I don't know if Europe,
if retail, will follow along or not. It's just it's
not sexy enough. It's not leverage, it's not a reconductor.
I mean, what about two x pigs? Does that start
to get who reason? Does that start to get spicy?
And then Europe you can go through.
Speaker 3 (17:32):
Put two x on anything and you'll get a couple
of bytes.
Speaker 5 (17:36):
I boil it down to Okay, we'll retail come back.
I don't know.
Speaker 6 (17:39):
And then when do the models start coming back to
overweight Europe? And I'm just not sure we're anywhere near
there yet. It will take far more outperformance for that
to continue.
Speaker 2 (17:49):
And I have a question for you, Gina, does Europe
even have tech? I mean, you know, you think I
looked at the best performers in Europe, the financials have
driven it. They're up fourteen percent. But I'm looking at
the performers. I don't really see any tech e. Is
there even a europe Tech ETF. I mean not sure
if one exists, Todd would know real quick.
Speaker 5 (18:07):
Uh it's almost like a.
Speaker 3 (18:14):
Military intelligence.
Speaker 6 (18:15):
Yeah.
Speaker 4 (18:15):
There was one play in Europe with a semiconductor wave
and that was asml in uh U have SaaS out
of Germany, but these are not This is a very
small component of the European broader market and that's the
biggest reason I would suggest why Europe underperformed the last
two years is there just isn't a lot of tech,
(18:35):
and tech was the area of growth opportunity. It was
the area that led global indices, not just the US,
but global markets with the most tech exposure outperformed. Aka
Taiwan was a huge outperformer. So that legacy of limited
tech is a big part of the story for why
(18:55):
Europe was not performing. Now it's helping because tech dropped.
It was the only sector in the US that dropped
in January. You know, it's not been performing well so
far this year as investors are rotating into other opportunities
and tech has proven to be a bit of a laggard.
Speaker 1 (19:10):
This really does feel like to bring it back to
that growth versus value thing, it's like growth will run
away with everything and then every once in a while.
Speaker 3 (19:18):
Yeah, every decade, Yeah, value will show up and yeah.
Speaker 4 (19:21):
Well, if you look at the long term, when did
Europe actually outperform for an enduring period of time. It
was in the two thousand and one to two thousand
and seven period when tech took a backseat to everything.
Tech was kind of there, but not outperforming everything, not
leading markets. We had a commodities boom, we had a
financial sector boom through a lending cycle. Those are the
type of that's the type of environment in which Europe
(19:42):
will outperform inevitably because of constituent bias and concentration.
Speaker 2 (19:53):
One question, if you're somebody who has a large chunk
of your equity allocation in US ETFs, would you would
it make more sense just rotate to international and have
some Asia in there, or maybe just do Asia. How
does Europe compare to other regions relative to the US
in terms of this like possibly having a moment coming up.
Speaker 4 (20:14):
Yeah, it's very interesting because China has actually performed very
very well so far this year, But India has been
officially in a bear market, so Asia is in the
eye of the beholder. What do you mean by Asia?
I have to say because if you think of Asia
as China, then it does appear that opportunities are emerging
in China, particularly now that we have tech plays emerging
(20:35):
as a potential competitor to the US. But Asia is
a very mixed bag because India is in a bear
market now, and we have to acknowledge that India had
some unique structural issues as well that elevated prices there
even as much as they were elevated in the US,
and now India is taking a back seat. So Asia's
a bit of a mixed bag. When you look at
(20:57):
Latin America, you also have a really mixed view between
Brazil and Mexico. Emerging markets in the Middle East and
Africa stand out for US as an opportunity, but the
investibility of that region is hugely, hugely questionable. How do
you even get access to that region, how do you
put money to work in that region? But that does
appear to be a region of the world where emerging
(21:18):
opportunities are huge. Yeah, definitely helps Japan and Australia are
areas of the world we haven't talked about. So if
you want to talk developed market, Asia, Japan and Australia
are two totally different markets. Japan is also in a
bit of a slump after leading along with the tech
wave until the middle of last year, and Australia is
(21:39):
a very commodity sensitive sector. So it depends on what
your thesis is. These are all very very different markets.
But right now, yeah, Europe kind of stands out relative
to the rest, mostly because of that valuation discount.
Speaker 2 (21:53):
And can we talk about the currency real quick, because
Todd is old enough to remember, like I am the
about ten years ago, these currency GTFP like we're like
rock stars. So HGDJ was the big one heads Europe.
That one's up twelve percent this year, so two percent
better than regular Europe.
Speaker 3 (22:09):
What about that?
Speaker 2 (22:09):
Could yeah, could a strong dollar actually maybe bring people
in back to that currency heads trade?
Speaker 4 (22:16):
Yeah? Yes, currencies are a big theme for us this year.
We've been focusing a little bit more on the en
than anything else. The en, you know, it is typically
a very risk off signal. The yen performing very well
would suggest that we're maybe some of our optimistic assumptions
regarding global equity performance should be questioned. But with respect
(22:37):
to Europe, there are quite a few people who suggest
that it was really the dollar rip that ultimately created
the downside for Europe and the second part of the
latter part of last year, because as the dollar was ripping,
the euro was the predominant downside risk that plays its
way through earnings in the short run in a very
very negative way. So we saw massive negative earnings or
(22:58):
vision momentums when the dollar was at its biggest rip
or it's biggest gaining at the point in which it
was gaining the most. Now we're seeing a little bit
of normalization there and that may be helping Europe. But generally,
if the euro gets cheaper, that's great for European exporters,
and a lot of these developed market European groups are
(23:20):
very sensitive to European exports. So if you get a
combination of China's growth improving and the Euro getting cheaper,
that's usually a pretty good sign that we're going to
get some earnings momentum emerging in Europe, and that may
be starting to price in.
Speaker 6 (23:34):
For the less sophisticated folks out there who listen. I'm
always a fan of the fifty to fifty allocation fifty
hedge fifty unhedged.
Speaker 5 (23:43):
Just because it's so hard to get a market right
and then get the FX right of it. And I
wonder if that's just the water down version of trying
to play Europe or international and there's ets for that.
So I like the fifty to fifty aspect.
Speaker 1 (23:56):
Okay, so just speaking of ETFs for that, I thought
what you said arelier about this being a great opportunity
for active investors potentially if you could put together that
three X pigs or what have you.
Speaker 5 (24:08):
What what would you.
Speaker 1 (24:09):
Want this to look like for Europe if you could,
if you could get go into Europe and have exactly
what you want, what would it look like?
Speaker 5 (24:16):
Well, I like to defend the industrial names.
Speaker 6 (24:19):
I think you have to have some of the those
European tech because they've been a beneficiary of this.
Speaker 2 (24:23):
Yeah and sorry.
Speaker 5 (24:29):
Sorry too, s A P A, s M A, s
M L. And then the financials.
Speaker 6 (24:36):
This is the first time I can remember that they're
actually leading and not causing a problem.
Speaker 5 (24:40):
I think this is amazing that we have.
Speaker 6 (24:41):
European financials are just stuck and higher, and I think
if you're really going to have an issue, whether it's
within Europe or within the global economy, you'll start to
see those names and their credit backdrop really deteriorate.
Speaker 5 (24:53):
I'm sure Gina will be on top of that as well.
Speaker 6 (24:56):
The European Financial eu f N, I think it's about
to hit new all time high. Eric's that's a long
time coming.
Speaker 5 (25:03):
Historic.
Speaker 3 (25:04):
By the way, there is a three x europe BTF.
Speaker 2 (25:06):
There you go get some guts so much an assets
it has, Todd, Oh.
Speaker 5 (25:11):
God, I don't even I don't even know what the
ticker is, to be honest.
Speaker 2 (25:13):
It's b u r L twenty two million, which is
really small. That means no one cares, there's no juice.
Speaker 5 (25:21):
No, but this is this is part of the argument.
Speaker 2 (25:23):
But if you're a pops like this, one's up thirty
percent this year because it's cripple Europe need more though,
But you got some of these single stocky tips go
up thirty percent a day.
Speaker 3 (25:32):
So this is just like child's play at this point.
Speaker 1 (25:35):
All right, well we we have the thing that we
can watch now, uh Todd. Gina, thanks so much for
joining us on trillions.
Speaker 4 (25:41):
Thank you for having us, Thank you very much.
Speaker 7 (25:48):
Thanks for listening. To Trillions until next time. You can
find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify.
Speaker 5 (25:57):
Or wherever else you'd like to listen.
Speaker 1 (25:59):
We'd love to hear from you. We're on Twitter. I'm
at Joel Webber Show. He's at Eric Waulchuna's.
Speaker 7 (26:06):
This episode of Trillion's was produced by Magnus Hendrickson. Bye
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