How huge is the difference between the US investment market and its counterparty formed by the major economies in Europe? Huge indeed, either when looking at the investors’ mindset, the infrastructure that houses it, or the investment alternatives. All the European market is well experienced in investing abroad, meaning buying securities provided by other European countries, or outside of Europe, like US and other global markets. The US market, on the other hand, is quite self-invested, pouring money into its own products. The need for FX handling in the European market, when compared to the US, is obvious. While the FX market in the US works as trading on its own, European countries need it on a daily basis to buy funds, stocks and bonds.
From the investor’s perspective, the stock market is a great example of how both US and European markets work. In the US most of the companies are owned by institutional shareholders, whereas the vast majority of European companies belong to a family. The government has also far more presence – and control – over European companies and its stocks than in the North American market. Those facts when matched with different investment mindset – US ordinary investors have a stronger belief in equities as a conveying channel to prosperity – may explain why there is a more powerful and buzzing stock market up in the North-American continent when compared to its European counterparty. It is quite interesting that even a relatively long period of very low interest rates in all major European countries were not able to reverse the strong difference in stocks multiples in both regions. The US stocks have always been and will probably be more costly than its equivalent in the European markets, so this might or not be a good opportunity, depending on how are assessed the reasons behind this fact.
Regarding the fixed income market, looking back to 2008 gives us a clear idea on how bold the US market can be, in all senses. In Europe, most of the debt financing private companies usually come from bank lending, not from private issuance. Part of the explanation lies In the greater risk-taking philosophy of US citizens and companies, but also the fact that the US market is far more structured when it comes to securitizing and selling debt assets than we find in any European market. Another possible reason is the long-lasting period of low interest rate, which makes it quite cheap for the local banks to borrow money from the market. The liquidity associated with US bonds is usually more fluid, since a large portion of European bonds are negotiated over-the-counter (or off-exchange). On the other hand, given the plethora of different currencies, maturities, types of bonds, and credit risks, the European context as a whole looks like a very interesting source for fixed income alternatives.
As expected, the funds outlook has deep distinctions between the two regions. Taking only the mutual funds – putting aside hedge funds and private equity – either open end, closed-end funds or ETFs are available in US and Europe. However, some important facts make the reality quite different. First, there is a little paradox when looking into the amount of funds and its total AUM. While there are 5 times more funds in Europe when compared to the number of US funds, the total AUM in Europe is almost half of what is amounted in the US. It is not hard to infer then that an average US fund is much larger than its equivalent in the European market. Now, two aspects of the European funds (known as Ucits) may make them more interesting. Firstly, in US all capital gains obtained by the fund’s portfolio must be transferred back to the investor, which ultimately makes it a bit less flexible. When a European fund realizes a profit, this capital gain may be incorporated back to the portfolio, which has also some impact on the tax liability. On top of this advantage, there are some alternative Ucits with quite a great flexibility, which allow for short positions, leverage, or even taking positions in private equity funds, features that usually are only found in its equivalent US hedge funds.
From a regulation standpoint, both SEC and FINRA act as the US sheriffs, overseeing the financial and investment activities, making sure no misleading or suspicious trade is carried out. The regulatory framework is applied across US and its scope is rather focused on the trading and its involved players (brokers in particular), than on the disclosed information that is sent back and forth. In Europe, a recent regulatory framework named MiFID II, released in January of 2018, is supposed to standardize and bring more guarantees to all parties involved in the investment market, specially the weakest end, namely the investor. Since many more transactions happen off the exchanges in the European market when compared to the US, it is almost mandatory to have such covering. A good part of the MiFID II framework describes and forces the total disclosure of fees and costs involved in a financial advisory or asset management practice. It may be good on one hand, however in some cases may bring more burden, especially for those firms unprepared or unused to such need – a good example are those US brokers and RIAs that potentially trade on European venues.Read other posts >>
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