For investors, China is more important than the European Union.
Many investors prefer domestic shares to foreign shares. Reasons for this are lower transaction costs, less currency risk, less dividend leakage or even a better hedge against domestic inflation. European investors often have a Europa-bias in which the terms Europe, the European Union, and the eurozone are often used interchangeably. As a result, the weight of eurozone shares in the index is often heavily overestimated. This is also due to the fact that there are asset managers who consider it quite normal to hold half of the portfolio in eurozone equities. This is despite the fact that all euro area countries together have a weighting of around 8% in the MSCI ACWI index.
Europe’s weight in the world index is around 16%. More than half of Europe in that index is made up of countries outside the eurozone: the United Kingdom, Switzerland and the Scandinavian countries. The European Union’s economy is rapidly shrinking. At the end of last year, the European economy was still USD 18.3 trillion, but, thanks to a contraction of 7.6%, 16.9 trillion remains at the end of this year. As a result of Brexit, the United Kingdom no longer counts, and only 14.3 trillion remains. As a result, the economy of the European Union is now smaller than that of China, a country whose economy is growing from 14.4 trillion to 15.2 trillion this year.
The market capitalisation of the eurozone and Chinese shares was virtually the same at the beginning of this year, both just over USD 8 trillion. But China is one of the best performing stock markets this year and eurozone equities are struggling. This means that there is only USD 7 trillion left in the eurozone, but China is approaching the 10 trillion mark. That is not reflected in the MSCI ACWI index, where China has a weight of around 5%. This is because MSCI does not include all Chinese shares, for example, because they are not yet part of the Stockconnect, but also because MSCI wants to gradually increase China’s weight in the world index. If Hong Kong, and possibly soon Taiwan too, become an integral part of China, the weight in the world index will skyrocket. In addition, the correction for free float is nowhere greater than in China. The major shareholders in Hong Kong are the wealthy Chinese families and all too often the Chinese state on mainland China. Despite this, China will soon overtake the European Union in the MSCI ACWI index.
The focus on the eurozone all too often means an investment in shares quoted in euros. Two major European stock markets — Switzerland and the United Kingdom — are then unfairly ignored. Moreover, shares in the United Kingdom are valued at a historically low level, partly because of the Brexit and partly because of the British sector division. The chances of a relief rally like Brexit are increasing, with almost everyone sitting on underweight British shares. In Switzerland, there are large multinationals such as Nestlé, Roche, and Novartis, companies that would not be out of place in any portfolio. Then there are the Scandinavian markets. The Danish stock exchange, for example, is one of the best-performing this year, with a plus of 23%, in stark contrast to the minus of more than 10% in the eurozone. Such a home bias is fine.
Europe’s home bias has cost a lot of money over the last ten years due to the strong outperformance of US shares. The risk for investors who are too heavy in Europe (i.e. more than 8% in the eurozone) is that the disappointing performance of European equities means that they do not want to adjust this now, for fear that they are dealing at the wrong time. As a result, they are now at risk of missing out on the major contenders for the next ten years, namely the Asian stock markets. Bear in mind that the home bias is mainly between the ears and makes a rational assessment based on the fundamentals. At the beginning of this year, probably not a single European investor was underweight in eurozone shares, but many were underweight in Chinese shares, and that is eating away at the returns.