Europe's technological weakness from an investor's perspective

[xlat]

There was an interesting article in Viisas Raha magazine, which stated that the value of US technology stocks has exceeded the combined market capitalization of all listed companies in Europe. Market values reflect well the reality that everyone can observe around them – we are surrounded by American tech giants in our daily lives. In addition, a significant amount of technology comes from Asia. Europe certainly has a technology industry, but its scale is clearly smaller than that of the United States and Asia, and especially on the consumer side, we are completely outmatched.

Technology is a tool, a very powerful one. All industries utilize technological development, and through it, efficiency and growth spread widely to companies. Because it is about vital development, the companies’ home countries or ownerships are by no means insignificant. In reality, Europe is very dependent, especially on the “technology flow” coming from the United States, i.e., the essential tools needed to compete globally. When it comes to important tools, large network effects, and a strongly growing market, tech companies are able to maintain high profitability.

From an investor’s perspective, the situation is a bit complex. The future of European stock markets in the long term is the same as the success of European companies. On the one hand, Europe has not performed well in technology, and on the other hand, in traditional industry, Asians are more efficient than us. To avoid being too pessimistic, Europe certainly has strong sectors. They are often located in Europe outside the EU (e.g., Switzerland and Britain), which means they cannot properly utilize the EU’s muscles in global competition, which means that their competitiveness may also be weaker than comparable countries in the long run. Europe (and the EU) is larger than the United States in terms of population, and there is also expertise here, but we have not been able to channel that expertise in the same way.

So, where does a profitable and growing future come from? Especially for an index investor, the question is very relevant – global diversification is in principle worthwhile, but buying asset classes with declining growth and profitability does not necessarily bring a good long-term result, even if you could get them very cheaply.

Link to the article: Europa putosi härän selästä - Viisas raha

[Masse]

Well… This doesn’t look good. The EU is more interested in immigrants’ affairs than in the success of our tech companies and thus our entire economy.

What do you do? Smart youth buy and trade US tech stocks through foreign brokers and keep their money out of Sanna’s clutches. Maybe repatriate it later if domestic politics ever changes. Emphasis on if.

Uncle Masse, FA, involved in OMXH mostly out of pity

[LS2]

To some extent, I think the issue is also about classification. In the USA, for example, Dollar Tree, whose business is retail, or Kraft Heinz (Heinz ketchup, etc… brands) are part of the Nasdaq 100 index.

But it’s still true that Europe is lagging behind, even if you clean up the index a bit. The last ten years haven’t been flattering for the EU economically compared to the US.

Purchasing power in the US is 1.5 times that of the EU area. Of course, in the US, most of the purchasing power is with the rich.

[xlat]

Thanks for the charts above, they’re very illustrative!

In Talouselämä a couple of years ago (issue 31/2018), Reima Rytsölä, Varma’s Deputy CEO responsible for investments, stated that “It is historically exceptional that the divergence between the United States and Europe continues so strongly. It might also be a good time to assess whether the growing gap is sustainable indefinitely.” However, it is difficult to say whether the gap will close with a collapse of the US markets or a rise in Europe.

I was already of a different opinion then and still am. In my opinion, there is no law of nature that dictates that the US and European stock market trends should move at the same pace. Of course, it’s quite probable that globally, markets will generate positive returns in the long run, but I don’t see that fundamentals necessarily go hand in hand. Because fundamentals ultimately determine how stock prices develop in different regions. And there have been good reasons for the stock price difference so far, as the pictures show.

[Mr_Wonderful]

On the contrary. Sergey Brin, Steve Jobs, Elon Musk, etc. I’d be quite sure that US tech emissions are clearly lower than those of EU companies. So, immigration and environmental issues don’t explain why almost all new tech comes from outside the EU.
However, this phenomenon is quite interesting. In my opinion, the EU is not a comparable economic area because it’s not a state, a federation, or anything like that, and we don’t even have a common language. The short answer to the question is clear, though: Germany. As long as the economy of the EU’s largest country operates on an export and surplus principle, driven by cyclical companies, we won’t have good conditions to develop in the same way as the United States.
By the way, Europe has some alternatives, but few use them: Dailymotion instead of YouTube, Qwant instead of Google, Linux, etc.

[Masse]

@G.J_Joe

So immigration and environmental issues don’t explain why almost all new technologies come from outside the EU.

Yeah, no, but it tells you what the EU is spending time and resources on and what it isn’t

Uncle Masse, FA, techno-humpa hypnotized

[perm4bull]

A very timely and good thread; I was pondering the same thing myself, which I wrote about in the general discussion about stocks thread.

Europe’s competitiveness is really weak right now, and there are many reasons for this. From a stock investor’s perspective, I see that even within Europe, the competitiveness of Finnish companies is dismal compared to, for example, Sweden.

In the US, society supports business culture, and taxation/politics support the growth and success of companies. In Finland, growth companies are taxed to death; Finland ensures that no one gets too rich. We also don’t know how to think big and sell services to the world, if we compare ourselves to Sweden alone, which constantly produces big success stories like Skype, Spotify, etc. In Finland, only a very few tech companies can grow into giants because the conditions for this are not created. In Europe, taxation for billion-dollar companies is significantly heavier than in the US. Then again, the further south you go in Europe, cultural differences also emerge, for example, in education.
Finland, as a country of good education and expertise, would have so much potential, but left-wing thinking prevents companies from succeeding.

As soon as things start going too well, the left-wing government tightens taxation to feed and care for our record-high mass of unemployed people.

Europe has a large amount of expertise and potential, but we just don’t know how to think big + we think more about people’s well-being than business success. Europe is a big social welfare office, whereas in the US, people know how and want to make money. There are pros and cons to this, and of course, for the average person, free healthcare, social benefits, and free education are good things. However, I have always thought, even though I’m not a millionaire, that from an economic perspective, successful companies and people create the conditions for growth. So some kind of middle ground between US and Nordic politics would certainly be the best solution.

[xlat]

Replying to/adding to the previous message: Just a gut feeling, but have you noticed that no matter the problem, Europe’s solution model is to increase regulation, restrict, and prohibit, while elsewhere in the world, there’s a desire to enable more and turn problems into opportunities for companies to do business and create well-being? And problems are “invented” entirely by ourselves, e.g., the excessive success and growth of companies are seen as a big problem in Europe.

More broadly across Europe, there’s an atmosphere that increasing restrictions and curbing the growth and success of companies would increase well-being. One major underlying reason is probably that the left and socialism were invented in Europe, and their legacy still exists, whereas in the United States, left-wing ideologies never really took hold. A certain anti-corporate sentiment is simmering beneath the surface.

Well, the above is of course simplified text, but having been involved in EU affairs to some extent, it’s not just a Finnish phenomenon but a broader pan-European culture. I would even argue that things are better in the Nordics than in central or southern Europe. Perhaps that’s why my portfolio contains extremely few European investments outside of Finland.