1- Three factors are often used to explain why, since 2008, US equities massively outperformed European equities.

1-Compostion of indexes: Technology has been a growing part of US indexes since the 90’s when ex growth sectors like Oil and financial dominated European indexes.

2-Economic growth: Since the Lehman crisis, the US have enjoyed a much higher economic growth rate than Europe and the Ukrainian war increased the gap between the 2 continents

3- Share buyback: US corporates have been, since 2008, the main source of purchase in the public equity sphere. Companies on the S&P 500 index spent $3.9 trillion buying back their own shares in the five years to 2022. This surpasses the $2.5 trillion they paid out in dividends over the same period. Between 2017 and 2019 (before Covid) 45% of US large companies bought back at least 1% of their shares net of any shares that were issued. In the UK, for the same period, only 21% of large companies bought back at least 1% of their shares, 11% in France and 7% in Germany…

2- Are share buybacks in Europe at an inflexion point?

In 2022, for the first time over the past 20 years, buybacks were more important in Europe than in the US (2.4% of market cap versus 2.2%) even if in absolute terms US corporates bought more than twice (834 billion) the amount (350 billion) bought in Europe. Over the past weeks of 2024, a flurry of major companies across Europe have announced new buybacks: Shell, Deutsche Bank, UBS, Carlsberg, Sainsburys, Unilever, Beiersdorf and Standard Chartered. Novo Nordisk said last week that they would reward shareholders in the same fashion.

What is interesting in these announcements is threefold: the number of European companies announcing return of cash in a geographic area (Europe) where share buyback had historically a bad reputation (management manipulation of share price and financial optimization), the number of sectors concerned (oil, banks, food manufacturing, pharma, cosmetics, beer) and lastly an indication of management view on 2024/25 outlook.

3-What are the US lessons for Europe?

After the Lehman crisis, share buybacks in the US were focused on underperforming sectors or companies. Buybacks were the ultimate weapon to address share poor performance. We can identify this trend in some recent European buybacks especially in oils where there are many questions marks on the outlook (Total, Equinor, BP, Shell) and banks which is an “ex-growth” sector in Europe (Unicredito, Société Générale, UBS, Barclays, Standard Chartered).

What we saw more recently in the US are “growth” companies embarking in substantial buybacks with the view that most important investments were behind us and that there were no obvious M&A targets. In its fiscal Q3 2023, Apple just spent 20 billion in buybacks, equivalents of 0.7% of its shares. Meta bought back 1.7% of its shares in 2023 and Alphabet 1.1% of its shares. 

Buybacks in Europe are not anymore concentrated in value/underperforming segments of the market. Last week Novo Nordisk, the most successful pharmaceutical company in Europe, just announced a 2 billion buyback. Following this trend, other major European growth companies such as ASML* or LVMH could soon announce buybacks above 1% of their market cap.

*ASML is a holding of Deshima Croissance Contrariante Europe.

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