Europe’s great stockmarket inversion
The hottest places to invest are on the continent’s periphery
Illustration: Satoshi KambayashiIt is one thing to face higher borrowing costs than other governments, but being charged more than even businesses in the country you govern marks a new low.
France’s fiscal position has deteriorated so badly that this is the situation its politicians are now in.
The yield on the country’s ten-year government bonds stands at 3.5%, against 3.3% for those of Greece—which in 2015 actually defaulted on the IMF.
In a surreal turn the French government now also pays higher interest than some French firms, including LVMH and L’Oréal, on debt of similar maturity.
These are, to be fair, globe-trotting giants with revenue streams that cross continents.
It is still quite something that bondholders consider them less risky borrowers than the world’s seventh-largest economy.
No wonder investors increasingly describe France as one of the euro zone’s “peripheral” countries, which once meant those hit worst by the sovereign-debt crisis of the 2010s.
The periphery (think Greece, Italy and Spain) saw its government bonds deemed risky; “core” countries (Germany most of all, with France not far behind) remained safe.
As they start swapping places, the analogy might be taken further, because it is not just the euro area’s sovereign-debt markets that are being turned inside out.
Across the continent more broadly, stockmarkets that investors once considered peripheral have begun to far outperform the one-time core.
Think of it as Europe’s great inversion.
True, investors are more excited about German shares than they have been in years, as the country prepares to open the fiscal taps and splurge on defence.
Its DAX index has risen by 19% in euro terms so far this year.
Yet that pales in comparison with share prices in Italy (up 24%), Poland (29%), Spain (32%) and Greece (39%).
Europe’s other core stockmarkets, meanwhile, have been trounced.
Britain’s FTSE 100 index is up by just 9%; France’s CAC 40 by 7%.
The periphery’s outperformance is new.
Europe’s core markets might not exactly have thrilled international investors in the 2010s, but they did nowhere near as badly as the rest.
The real value of a dollar invested in the DAX at the start of the decade would have been $1.40 by the end of it, excluding dividends.
France’s CAC 40 and Britain’s FTSE 100 would have made small real losses.
(America’s S&P 500, for comparison, would have returned $2.40.)
Over the same period, dollar investors in Italian, Polish and Spanish shares would have lost between 40% and 50% of their real value.
Owners of Greek stocks would have lost nearly three-quarters of theirs.
Most of all, the inversion in shareholders’ fortunes reflects changes in Europe’s economy.
German GDP shrank in 2023 and 2024, while British and French annual growth stagnated at around 1% or less.
By contrast Greek and Spanish output—both of which contracted sharply in the early 2010s—last year grew by 2.3% and 3.2%, respectively.
Although Polish growth has been hot for years, for much of that time investors were spooked by the interventionist and anti-EU Law and Justice Party’s control of parliament.
After its replacement in 2023 by a more market-friendly coalition, Poland’s stockmarket went gangbusters.
However, the story is not all about the economy.
Italian stocks have also done well, after all, and recent growth has been about as lacking as in the core.
The country’s best-performing stock so far this year is Leonardo (up 93%), a company that builds fighter jets and shows that Germany is not the only beneficiary of higher defence spending.
The next five, with share prices up by between 40% and 67%, are all banks or groups that own them.
In fact, banking shares account for around 40% of the market value of firms listed in both Italy and Greece, and in each case are responsible for much of their outperformance.
For years, their banks were the continent’s deadweight.
During the euro-zone crisis the risk of sovereign default made policymakers worry that banks’ balance-sheets, loaded with government bonds, would crumple.
That created a “doom loop”, constricting lending to the wider economy, thereby slowing growth and making the public finances even worse.
Investors viewed peripheral bank shares with extreme distaste: they represented the sum of Europe’s fears.
Now they are some of its brightest stars.
However disappointing for its core, Europe’s great inversion is a sign that the periphery’s darkest days are behind it.
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