Tuesday, April 03, 2007

Europe tops US in stock market value

Europe tops US in stock market value
By Tony Tassell
Copyright The Financial Times Limited 2007
Published: April 2 2007 21:48 | Last updated: April 2 2007 21:48

Europe has eclipsed the US in stock market value for the first time since the first world war in another sign of the slipping of the global dominance of American capital markets.

Europe’s 24 stockmarkets, including Russia and emerging Europe, saw their capitalisation rise to $15,720bn (€11,819bn) at the end of last week, according to Thomson Financial data. That exceeded the $15,640bn market value of the US.

The rise of the euro against the dollar, growth of east European markets such as Russia and stock market outperformance spurred by improving profitability have seen Europe close a long-held gap with the US. Ian Harnett at Absolute Strategy Research, who identified the move, said this marked a “seismic shift” in markets.

The last time Europe eclipsed the US in market capitalisation was likely to have been before the first world war, said Mike Staunton, stock-market historian at London Business School. The shift mirrors a trend in the debt world, where European activity has caught up, and in some cases overtaken the US.

European shares have outperformed the US, with their market capitalisation rising 160 per cent since the start of 2003 in dollar terms, said Thomson Financial. That compared with a 70.5 per cent rise for the US stock market. Over that time the euro has risen 26 per cent against the dollar.

Europe trails the US on the indices of market capitalisation compiled by FTSE and MSCI and which are used by fund managers as benchmarks.

However, these have a reduced or no weighting to shares that cannot be freely traded such as holdings of governments or controlling family shareholders. Europe has more companies with such stakes.

The Short View: European stocks top US
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: April 2 2007 19:57 | Last updated: April 2 2007 19:57

Europe, if you are a stock investor, is now bigger than the US. The landmark, passed last week, has been achieved despite the retirement of a net €107.1bn (£72.4bn) in European equity over the past two years, according to Citigroup. Its import goes far beyond the noise over the impact of Sarbanes-Oxley corporate governance rules.

That said, there are caveats. First, the definition of “Europe” is one that economists, market analysts, or even geographers would not normally recognise. It covers all of “emerging Europe” – including Turkey and Russia. This is “Europe plus Siberia and Anatolia”. By crossing the Urals, “Europe” includes Russia’s fuel reserves. By crossing the Bosphorus, it gains the Turkish economy, currently growing at more than 6 per cent. The population of this “Europe” is about 2.5 times that of the US. North America, including Canada and Mexico, might be a better comparison.

Secondly, while the Thomson Financial/Datastream indices show this landmark, the FTSE and MSCI indices, more widely used by international investors, do not. MSCI shows the US as 37 per cent bigger than Europe. This is because Datastream, unlike FTSE and MSCI, does not adjust for the size of free floats, and hence gives European market cap full credit for formerly nationalised companies where governments retain a stake. This better captures underlying value, but MSCI and FTSE arguably better capture the reality facing investors.

But Datastream still captures a secular trend. Europe’s economy is growing faster than the US. The euro has gained against the dollar for all of this century. Germany out-performed all other big markets in the first quarter, with the Dax up 4.85 per cent. The S&P 500 was flat.

Some of these factors could prove temporary. But the shift in corporate culture looks deep. For decades, through boom and bust, US companies were more focused on shareholder value, and delivered far higher returns on equity than their European counterparts. Restructuring has turned that round. According to Absolute Strategy Research, European companies managed a return on equity last month of 17.5 per cent, compared to 16.5 per cent for the US.


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