As the Euro Stoxx 50 index surges, beware of these 2 risks

European stocks have started the year well as demand from local and international investors has risen. The closely-watched Euro Stoxx 50 index surged to a record high of €4,671 on Friday, making it one of the best-performing global indices this year. Other European indices like the German DAX, FTSE MIB, and CAC 40 have also rallied.

European equities have rallied mostly because of the rising optimism that central banks will change their tune on interest rates this year. In the US, the Federal Reserve has hinted that it will start cutting rates sometime this year. 

Other central banks like the European Central Bank (ECB) and the Bank of England (BoE) are also expected to follow suit since inflation has eased sharply from the pandemic-era high. In Europe, the headline Consumer Price Index (CPI) is hovering at 3% and it could move lower this year. 

Global stocks tend to rally when there is hope that central banks will cut interest rates in the near term. Besides, the market is coming from a period when interest rates have jumped to their highest levels in decades. This also explains why key American indices like the S&P 500 and Nasdaq 100 have jumped to record highs.

The Euro Stoxx 50 index has also rallied because European stocks are seen as cheaper alternatives to the expensive American equities. For example, the S&P 500 index has a PE multiple of 23 while the Stoxx 50 has a multiple of less than 50. 

This discrepancy is mostly because the index is made mostly of value stocks. US indices are mostly weighted towards technology companies like Nvidia, Microsoft, and Meta Platforms.

Euro Stoxx 50 index chart

China is the biggest risk that the Stoxx 50 index is facing since most companies in the index count it as its biggest market. A good example of this is companies like LVMH, Kering, and Hermes, which sell most of their merchandise in China.

As China’s stocks crumble, it means that investor and consumer confidence will drop, leading to weaker sales this year. Recent data show that China’s retail sales have plunged sharply in the past few months. 

ASML, one of the biggest players in the semiconductor industry, is also facing regulatory challenges as tension between China and the US rise. The company has been restricted from selling some of its equipment to Chinese companies.

Further, European automakers are also in trouble as Chinese companies pump millions of EVs to the market. The impact is that they will have to reduce prices, which could affect their margins. Also, there is a risk of retaliation from Beijing if the EU places tariffs on China EVs.

The best-performing Euro Stoxx 50 companies in 2024 are ASML, SAP, Flutter Entertainment, and Safran. ASML and SAP published strong results, helped by AI demand while Flutter made a dual-listing in the US.

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