Quid Europe and European Equities?

"Who do I call when I want to talk to Europe?" Henry Kissinger is famously said to have quipped, lamenting the continent's lack of leadership and unity. These days, the answer, at least for global investors and CEOs, might be "Mario Draghi." Last week, the Italian uber-technocrat—nicknamed "Super Mario"—released his long-awaited 400-page report on Europe’s competitiveness. As Draghi highlights, over the past decade, European economies have experienced sluggish growth, while productivity has slipped to 85% of U.S. levels. Conventional wisdom suggests this has been a major factor behind the underperformance of European stocks relative to the U.S., explaining their perennial valuation discount and declining share in the MSCI World Index.

The release of Draghi’s doorstopper coincided with a trip I made to Paris, where I met with more than a dozen European companies across various sectors, as well as analysts, investors, and strategists. It seems an apt moment to take stock of the state of European equities and reconsider the narrative of Europe’s decline.

Joe Biden, Xi Jinping, and Emmanuel Macron have a meeting with God. Xi says: “My country faces many problems: declining demographics, slow growth, a real estate bubble. How long before these problems are solved?” God answers: “Fifteen years”. Xi begins to cry, “I am an old man. I will be dead by then”. Biden says: “My country is troubled: inflation, polarization, inequality. When will this be solved?” God responds: “Ten Years”. Biden begins to cry: “I’m an old man. I’ll not make it through the next five years”. Then Macron says: “France, and Europe have many problems: low growth, low productivity, immigration, geopolitics. How long until these issues are solved?” God begins to cry.   (Paraphrasing an old joke told in the Soviet Union)

 

Tech’nical Difficulties

 

The chart above illustrates that Europe is particularly lagging behind in the Technology sector. America's tech giants are significantly larger and more profitable. Draghi observes that “Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. In fact, there is no EU company with a market capitalisation over €100bn that has been set up from scratch in the last 50 years, while all six US companies with a valuation above €1tn have been created in this period”. Given the disparity in spending on AI infrastructure, this gap is expected to widen.

 

A more nuanced picture elsewhere

 

The Consumer Products sector is one area where EU companies and their U.S. peers match each other in terms of ROIC and average revenue. This can be attributed to Europe’s strong market leadership in categories such as Food & Beverages and Luxury Goods.

 

Several meetings in Paris highlighted this dynamic. Take Food, for instance. The French company Danone, a global leader in dairy, explained how sustained investment in R&D and a solid track record in sourcing position it to maintain above-category growth with premium pricing. While U.S. giants like Mondelez and PepsiCo dominate the branded "snacks" category—where returns have been easier to achieve—it might be time to consider healthier European alternatives, especially in the age of GLP-1 drugs. Meanwhile, the Swiss chocolate maker Lindt & Sprüngli, whom we also met in Paris, exemplifies Europe’s strength in achieving superior margins and growth through premiumization. Closer to home, the same can be said of Lotus Bakeries.

Luxury Goods is a sub-sector entirely dominated by European companies. In our Paris meetings with LVMH and L’Oréal, short-term challenges were discussed, particularly weakness in China and slowing growth in the U.S., which are reflected in weak YTD share price performance. However, we left the meetings reassured of both companies’ strong market positions and near-impregnable economic moats. L’Oréal’s competitive advantage lies in its diverse brand portfolio, strong R&D capabilities, and consistent product innovation, backed by sustained A&P investment. This has enabled its share price to outperform that of its U.S. peer Estée Lauder. LVMH and its rival Hermès, on the other hand, benefit from more than 100 years of brand heritage, craftsmanship, and continuous reinterpretation of their core products, driving historically high margins, solid top-line growth, and strong stock performance.

Elsewhere in the Consumer sector, Retail stands out as an area where U.S. companies are significantly larger and more profitable. They cater to a significantly larger and uniform end market, drawing significant benefits of scale. However, operating in a more competitive and fragmented market compels European players to become more agile, which ultimately offers them distinct advantages. In Food Retail, as discussed with Ahold Delhaize, European supermarkets excel in sourcing and in managing the shift from branded goods to private labels. In Apparel, Inditex—the parent company of Zara—has optimized its sourcing and merchandising to cater to Europe’s diverse customer base and is now expanding globally from a strong position.

 

In addition it is worth noting that some of Europe’s largest retailers are family-owned. IKEA, the world’s largest and most successful furniture retailer, remains a private company, as are Aldi and Lidl, two of the best-run budget food and general retailers globally.

 

Performance comparison: S&P 500 Apparel Retail vs. Inditex (2002–2024)

 

In the Industrial sector, the story is similarly nuanced. In Paris, I attended a confident presentation by Schneider, a global leader in electrification, which highlighted its high single-digit structural growth, superior margins, and strong valuation premium. Elsewhere, particularly in Scandinavia, European companies compete credibly on a global scale in niches ranging from access solutions (Assa Abloy) and automation (ABB) to mining equipment (Sandvik). The relative performance of Investor AB, a Swedish conglomerate that holds stakes in several of these companies, has been in line with the S&P Industrials over the long term. Another example is Airbus, which has outperformed Boeing in terms of market share, operational excellence, and total shareholder returns.

In Healthcare and Pharmaceuticals, the U.S.'s privatized healthcare system has fostered a diverse ecosystem of companies, including specialized private health insurers, pharmacy benefit managers, medical distributors, and large private hospital chains. Coupled with a greater appetite for M&A activity among U.S. Big Pharma, this explains the disparity in market capitalization compared to Europe. Nonetheless, on a directly comparable basis, European stocks hold their own. Big Pharma, wherever they operate, face the same operational and regulatory challenges and sell into the same end markets. Meanwhile, Europe boasts strong expertise in medical devices, with prominent companies like Philips, Siemens Healthineers, Sonova, Coloplast, bioMérieux, and Straumann. We met Straumann, the world’s leading dental implants maker, in Paris and found their market position highly convincing, driven by a strong focus on R&D and training. Finally, in the race for GLP-1 treatments, both regions have a leading contender with Eli Lilly and Novo Nordisk.

 

The Limits of Fragmentation

Europe underperforms the U.S. in sectors such as Telecommunications, Energy & Utilities, and Media. Since the markets for these industries are predominantly national, fragmentation and the lack of scale are unavoidable consequences. To some extent, as seen in Energy & Utilities and Telecommunications, further liberalization of markets within European member states could encourage more cross-border investment and M&A activity. However, it's unclear whether forcing cross-border mergers would benefit shareholders or consumers, who might end up facing higher prices.

 

It's also worth noting that from an equity investor’s perspective, these sectors have historically delivered below-average returns, even in the U.S. In the case of Media, Europe’s diversity of languages and cultural differences present significant barriers to achieving scale. Past attempts to build cross-border media empires, such as those by Vivendi and Bertelsmann Group, have often been driven by ego and have rarely delivered positive shareholder returns. Notably, media companies that have succeeded on a global scale, such as Wolters Kluwer and Publicis, distinguished themselves by embracing digital transformation early.

 

 

Draghi’s 800bn bazooka: Mo Money, Mo Problems?

 

In 2007, Europe had an economy and corporate sector (in terms of net income and market capitalization of listed companies) comparable in size to the U.S. Today, the U.S. economy is 50% larger than the EU economy (in current nominal U.S. dollar terms), while the U.S. equity market is more than three times the size of Europe’s. However, it’s important to highlight the fourth chart above, which shows that the U.S. has benefited from a combined monetary and fiscal stimulus totaling approximately USD 30 trillion since 2007, compared to roughly USD 5 trillion in Europe. With his call for an additional €800 billion per year in spending, Mario Draghi seems to be advocating for narrowing this gap.

However, even without delving into the debate over whether central governments are best suited to manage such matters, this overlooks several issues. The enormous fiscal and monetary expansion of recent years in the U.S. has come at the cost of an unprecedented increase in national debt and soaring budget deficits. And this is happening even before the kind of spending increases Draghi envisions. In Europe, debt and deficits are already at record levels. Moreover, as a net recipient of global savings, the U.S. enjoys more leeway from global investors, who may be less willing to finance European fiscal largesse. Adding more debt in a region with stagnating asset prices and declining demographics—both of which impact the quality of collateral for that debt—poses significant risks.

For Draghi to correctly diagnose Europe’s innovation problem and then advocate for €800 billion in government-directed spending feels like encountering a drowning man and handing him a sandwich— not the right time. Instead, reducing the regulatory burden, easing antitrust restrictions to facilitate cross-border mergers, fiscally incentivizing risk-taking, enabling more capital flows through more integrated financial markets, and promoting cross-border knowledge exchange seem like more prudent approaches. These measures are more likely to garner broad political support and therefore stand a better chance of success. As Matt Brittin, CEO of Google EMEA, noted in a recent letter to the Financial Times: “the EU is holding itself back at a time when it could be thriving. Our research with Public First shows that generative artificial intelligence alone could add €1.2tn to the European economy. Much of Google’s innovation is led from Europe. We work with talented European businesses, entrepreneurs and innovators every day and see first-hand the benefits that the single market could yield for them.”

The Eurocracy tends to forget that Europe’s greatest competitive strengths—from its rich heritage and culture, and its local clusters of entrepreneurship (from Lombardy to Eindhoven), to its excellence in many “quality of life” metrics (from longevity to education)—predate the EU’s expansive regulatory framework. A more modest, back-to-basics reform package aimed at revitalizing free markets might be more appropriate. In this, Mario Draghi should heed the famous words of his fellow countryman, Tancredi in Giuseppe de Lampedusa’s ‘The Leopard’, when confronted with a changing world: ““Everything must change for everything to remain the same”.