Anguish on Wall Street as European Stock Markets Push US off Pole Position ; BUSINESS ANALYSIS
Foley, Stephen, The Independent (London, England)
There is another new taunt in the "yah boo sucks" slanging match between the City of London and Wall Street. The value of European stock markets has eclipsed that of the US.
The moment slipped past unnoticed last Thursday, but make no mistake, it was a historic occasion. Totting up the value of all the companies on the 24 stock markets of Europe, from west to east and taking in Russia and Turkey, you get $15.73 trillion. That's a nudge ahead of the total of US-listed companies, and you probably can't have said that since the end of the First World War.
Now that the news is out there, it has immediately been pitched into the argument over whether New York is in danger of losing its position as the financial capital of the world. For London, it is another piece of evidence to back the Stock Exchange's boasts that it is attracting foreign companies that would previously have looked to list in the US. And for some Wall Streeters, it adds new urgency to their calls for looser regulation and other measures to win back lost business.
It is an important piece of evidence in that debate, for sure, and there is no doubt that the London listings of Kazakhstani copper miners and Chinese phone manufacturers have contributed to Europe's swelling market capitalisation. But there are bigger reasons for the shift and wider lessons to be learned.
For the record, the figures come from Thomson Datastream, not the traditional calculators of indices, such as FTSE or MSCI. These others strip out government holdings and other shares that are not generally available to investors, which lowers the value of European markets, which include many partly privatised companies and the like.
The first reaction of many on Wall Street yesterday was to dismiss the figures as a distortion or an irrelevance. Russia should- n't be included as part of Europe, some said. Others asked, what is the point of a comparison with a geographical area that covers two and a half times as many people as the US? And still more said that FTSE and MSCI figures better reflected the size of the equity market available to investors, where the US still wins by anything from 15 per cent to a third. Fair points all, but none diminish the significance of the underlying trend identified in the Thomson figures.
A number of factors have combined to push Europe into pole position: overseas acquisitions by European companies; the declining value of the dollar; the emergence of Russia and other former Communist states as economic powerhouses. And one other factor, too - European companies have made more profits for their investors in the past few years than US companies.
Ian Harnett, the independent analyst who spotted that Europe had overtaken the US and alerted his clients on Monday, said investors have rewarded continental European companies for painful restructurings that have improved their returns on equity (their profits relative to the book value of the company).
"The change in relative ranking of Europe and the US also reflects underlying improvement in the fundamentals for European companies relative to those in the US. In early 2004 both European and US returns on equity averaged 12 per cent, but the average return on equity for quoted Europe is now above that in the US - something almost unimaginable in the mid-1990s."
It is this that lies behind the spurt put on by European markets over the past four years. The declining value of the dollar against the euro may have accounted for about 20 per cent of the gain over that period, but not a majority. Even stripping out emerging markets - including Russia, whose equity market has quadrupled in value - would reduce the gain by about 9 per cent, Mr Hartnett suggests. …