Mind the gap - USA v Europe
17 February 2015
The gap in performance between the equity markets in the US and Europe is nearly the largest in 20 years. Standard Life Investments, the global investment manager, has taken a closer look at the yawning chasm between the two markets to identify why and what this means for investors.
In the latest edition of Global Perspective, research by Standard Life Investments shows that some important structural drivers may have been overlooked when choosing to invest in both markets. The team used individual company balance sheets and income statements to find explanations and suggest what could cause the gap to close in coming years.
What they found was that whilst the macro economic backdrop has played a more significant role in driving returns over the past decade across global markets, US firms have been much more efficient at managing their balance sheets and restructuring, in the new post-financial crisis world, than their European peers:
- US firms are often better at taking advantage of globally low interest rates by reducing equity through share buybacks and increasing leverage.
- The relatively quick repair to the US financial system helped businesses in their efforts to restructure – through quick bankruptcy and efficient management of working capital.
- The best US companies increased global exposure faster to benefit from a trend depreciation in the US dollar.
- Post financial crisis few European businesses were able to eke out supersized profits – only two by 2014. By contrast in the US there was a doubling of such firms – to an average of 13 each year.
Chris Faulkner-MacDonagh, Markets Strategist, Standard Life Investments said:
"We found that there aren’t enough large global companies in Europe which are capital disciplined enough to take advantage of low interest rates and manage their assets and liabilities aggressively.
"Capital disciplined businesses in Europe are twice as likely to be small, which limits global exposure, reduces scale economies and impedes access to capital markets.
"At the moment investors are willing to pay an exceptional premium to access US assets that offer truly outstanding returns, but a key test will be to observe how US firms react to plans by the Federal Reserve to normalise monetary policy and raise interest rates. Investors who are looking for signs of the gap closing and change in the marketplace, should also watch for signs of European firms increasing their focus on return on equity by restructuring their balance sheets, and doing share buybacks to boost profitability."