In the past 10 years thedominance of American stocks on the marketsit was phenomenal and left the European ones far behind in terms of performances (S&P500 +310% over the period vs Stoxx600 +160%) and market capitalization (the total market cap of listed companies is worth 75tr Usd in the USA compared to 15tr in Europe).
This phenomenon is explainedfrom the incredible success that US companieshave had in multiple sectors, certainly largely linked to the world of technology, AI, digital, but also in more “traditional” areas such as banks, companies in the defense sector, consumption.
Why has Europe fallen so far behind?Are there areas in which our continent remains a leader and competitive?What reasons lie behind the global success of American companies?
We are able to answer these questions given that at Banca Patrimoni Sella & C. we have analyzed the topic in depth in the past weeks.
The factors that are striking and worth highlighting in our opinion are:
1) The “scale” of American companies is much higheron average they are 5 times larger than European ones. In a world in which to remain competitive it is necessary to make increasingly larger investments, this element is often a critical success factor. Let’s consider that in the “tech / infotech” universe here the scale ratio becomes 19 to 1 when measured in terms of the market cap of the ten largest companies (USA 24tr Usd vs Europe 1.3tr), something enormous.
The European alternatives on the cloud side, web services, digital marketing, AI, messaging exist and are very valid, and we have talked about it in this column in recent months, but they arrive “late”, they are not the size of the American (or Chinese) ones and they struggle to “spread” sufficiently, even within the EU itself.
Even if we look at sectors in which Europe is strong and has a great tradition such as banks, we observe that to reach J Morgan Chase’s market cap (900b USD) it is necessary to bring together the top 10 European banks. Perhaps this should give a lot of thought to those who get in the way as soon as some daring banker implements a bit of European consolidation, any reference to ongoing operations is purely coincidental.
2) European companies dominate the global panorama or in any case are well present in the top 10 in more “traditional” sectors, from utilities (Iberdrola, Enel, Engie) to food & beverage (Nestlè, Anheuser Busch Inbev), from fashion / luxury (LVMH, Inditex, Luxottica) to industrials (Siemens, ABB, Schneider) up to health care (Roche, Astrazeneca, Novartis), but they are marginal in many of the most innovative sectors of the changing world, with very rapid growth, in which the first mover advantage often turns into a monopoly/oligopoly position difficult to attack.
The data based on the market capitalization of companies is fully confirmed by the dataon European exports: we are the leading continent with world export shares between 25 and 30% in luxury, machinery, chemicals, food, wine, high-end textiles, medicines, the automotive and components sectors. We are almost absent or marginal in sectors such as software, semiconductors (ASML aside), communication services, digital advertising, social media, defense and aerospace.
3) The European shortcomings appear to be linked to three factors: lower investments, cost penalty, lack of a common capital market.
Investments show that with a few exceptions (pharma and autos) theEuropean companies invest less on averageof the American ones and this penalizes them in terms of growth over time. The Draghi report certified this situation clearly.
Secondly, European companies are penalized bydouble energy costscompared to American competitors and triple compared to Chinese ones. And from price competition in traditional sectors that is becoming increasingly stronger due to the advance of Chinese or Asian producers. The example of what is happening to the automotive sector is clear; other areas and sectors are affected by similar phenomena.
Finally, sidecapital marketswe know well that having for now maintained ahigh fragmentationat a European level it does not help investments, it makes the European panorama less competitive, it leads European companies, perhaps highly innovative, to list overseas (Bending Spoons is the latest example) and it keeps important private capital away from more profitable investments (over 35% of European private wealth is held in bank deposits and current accounts, around 14 billion euros).
There is no doubt that a change of pace (and vision) is more necessary than ever.
