With the current changes happening in the world, both in the economic and political sector, people who usually invest in the stock market are left wondering whether such investments are worth the risks or not. Even if the changes we just mentioned are more prominent in the U.S., Europe is also witnessing a lot of changes that have a direct correlation with the stock market. In today’s article, we’re going to explore the European stock market and see whether you should invest there or not.
In the future, European markets will probably still be cheaper to invest in than U.S. ones. Still, this is only normal if we take into account the risks associated with it.
European Stock Market: Current Situation
Europe is witnessing a situation similar to the one in the U.S., namely a drop in the working age population. This means that productivity is decreasing as well, and will continue to decrease in the future. In turn, the economy will keep being sluggish, and the inflation will be low. Investments are also low, and so is the demand for credit. All of these things combined make economists worry about how sustainable the euro system will be in the long run.
While things seem to be pretty bleak, there’s also good news for people who are looking to invest in the European stock market. That is the fact that there still are strong European companies constantly growing and expanding all over Europe and the world. These companies have a bright future ahead, future that involves high returns on capital, pricing power, power to expand margins and grow volumes, and so on.
Among these companies, the most profitable ones for investors are those that are Europe-based and choose to expand globally, while trading at a discount compared to their inherent value. Most such companies are medium sized and belong to the hi-tech engineering or branding sector.
European Stock Market in the Future
When it comes to politics, Europe has a big year ahead. Elections are happening in countries such as Germany, France, and Holland. Even if the European Central Bank has promised it will keep its loose monetary policy that supports equities, the situation is quite uncertain. That’s because politics could influence the fundamentals a lot. This would make it difficult for investors to navigate the European stock market. As we’ve already seen in 2016, unexpected election results are entirely possible. These results could shift the situation of the markets.
In the future, European markets will probably still be cheaper to invest in than U.S. ones. Still, this is only normal if we take into account the risks associated with it. For instance, the Eurozone still doesn’t have a clear banking system.
Should You Invest in the European Stock Market?
All things above considered, is it worth investing in the European stock market? Perhaps. If you’re excited about the low prices, we have to advise you to be careful. They don’t necessarily mean you’re in for a bargain. Before investing in anything, make sure to look at the price of the stock and compare it to the earnings. The ratio between price and earnings (price divided by earnings) tells you one main thing. That’s the fact that the lower the ratio, the cheaper the stock will be.
We hope today’s brief guide has helped you understand the situation in the European stock market and decide whether or not you should invest in it. For more information on how the stock market works, make sure to check out one of our previous articles.
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