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August 24, 2023

Unlocking the (not so) hidden potential: the role of European equities in a comprehensive investment offering

Julieta Varsano
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B2B Marketing
The role of European equities in a comprehensive investment offering

The world of investments is constantly evolving, and as global markets continue to grow, there is one region that stands out for its significant hidden potential – Europe. Offering European equities is not just an option, but a strategic imperative for financial and investment companies looking to thrive in the modern landscape.

Incorporating European equities into a full-scope investment offering is a must-have for companies wishing to gain a competitive edge. This strategic move aligns with the changing preferences of both first-time and experienced investors. Therefore, tapping into the European market can serve as a growth catalyst for financial and investment businesses.

Democratising investments: rise of fintechs and neobrokers

The investment landscape has witnessed a seismic shift with the rise of fintechs and neobrokers. Innovative platforms such as Robinhood in the US and Trade Republic in Europe have democratised access to investments for a multitude of diverse demographics. By offering low- to no-commission investment options, they have empowered a wave of first-time investors to take their first steps in the complex world of capital markets. Robinhood and Trade Republic alone have enabled 24 million investors during 2015-2022, with half of them assumed to be novice investors12. Furthermore, they have empowered long-time investors to radically decrease their order fees and to participate in fractional investing1. Neobanks such as Revolut have also ventured into the investment category, thus meeting their end users’ rapidly evolving needs.

A common trend we see today among many personal finance providers and investment companies is a single focus on US-based equities. However, looking more closely, one can see that there’s a (not-so) hidden potential in expanding the offering to include European equities as a natural way to reach new audiences. Looking at the market, it becomes clear that to attract new users and unlock untapped opportunities, it is inevitable to embrace a comprehensive product offering that goes beyond US-based equities only.

Offering European equities is a strategic necessity for financial and investment companies looking to thrive in the modern landscape, as it serves as a gateway to attract both first-time investors seeking familiarity and experienced investors looking for better diversification. 

European equities offer substantial opportunities for growth and resilience, making them a must-have in any comprehensive investment offering.

  1. European equities as a multiplier of investment volume and users
  2. European equities as a gateway to attract more first-time investors due to familiarity
  3. European equities as a tool to offer better diversification for long-term investors
  4. European equities as a must-have for any comprehensive investment offering

Offering European equities: a multiplier of investment volume and users

Offering European equities in addition to US-based stocks serves as a catalyst for expanding investment volume and user growth by building trust and fostering long-lasting relationships.

Consumers vote with their wallets and those wallets are getting bigger - 64% of investors say they’re going to invest between $5,000 and $50,000 of their current cash over the next year, with 84% of those planning to invest in stocks3.

Investors only use wealth and trading platforms that fulfill their needs and prefer not to juggle between providers, with 61% of investors saying they would invest more if they could trade all their investments on a single platform4.

By listening to what users really want, financial and investment companies demonstrate their commitment to users' financial wellbeing. This fosters trust and loyalty over time, as users recognise the value of using a financial platform that understands their needs and is actively supporting them to achieve their financial aspirations.

Some of the fastest growing companies (e.g. Trade Republic, Scalable Capital, Freetrade, etc.) offer European equities and are rapidly expanding their business. For companies looking to attract a wider audience, a deep understanding of the requirements and preferences of their users (first-time and experienced investors alike!) is essential.

First-time investors want to invest in stocks they are familiar with

First-time investors often choose stocks from the brands they know - either because they use them on a daily basis (e.g. Adidas, Netflix) or recognise them due to familiarity (e.g. Mercedes, Tesla).

Even though the entry barriers to invest have never been lower due to low-commission digital brokers, there is still a broad restraint to invest among the general population. Across major global markets, only the US sees a level of individual stock ownership that goes beyond 60%5, compared to 33% in the UK and only 15% in Germany6.

In many cases, decision paralysis can be the underlying reason. For first-time investors, the possible options feel too overwhelming and the risk is often perceived as too high. In such an uncertain environment, familiarity can play a pivotal role7. Familiarity most often stems from either regional identification (“I want to invest in firms from my home region”) or brand identification (“I want to invest in firms I know and like”).

According to Brand Finance8, 2 out of 3 of the world’s most recognised brands originate from Europe and the US, out of which 40% are European. Moreover, about 70% of these brands belong to companies that have direct end-user relationships. European brands are recognised globally - European companies generate approximately 60% of their revenues from abroad, compared to just 30% for US-based firms9. This familiarity makes it significantly easier for first-time investors to bridge the gap between wanting to invest and knowing which assets to invest in. In fact, expanding an investment offering with European equities almost doubles10 the choice for investors, leading to increased investment demand and engagement.

By offering European equities, financial and investment businesses can encourage and support first-time investors to take their first steps in owning shares of the companies they interact with in their day-to-day lives. From tech giants in the UK to luxury brands in France, there is a vast array of opportunities that can drive substantial returns for investors. Here are a few notable examples:

Long-time investors: diversification to reach the optimal risk-return tradeoff

Diversification is the key component to long-term engagement of retail investors looking to capture growth opportunities and spread risk.

Long-time investors know that diversification is the key to striking the right balance between risk and return, so they allocate their funds across asset classes, regions, and industries. An exclusive focus on a limited asset scope, such as solely US-based stocks, will not be enough to match their investment needs. By offering European equities, businesses can empower their end users to build more robust and resilient investment strategies and be better equipped to weather market fluctuations.

Geographic diversification can mitigate country-specific risks and currency fluctuations, while industry diversification reduces exposure to a single sector’s performance. Europe is a hotbed of emerging growth sectors (e.g. clean energy, biotechnology, and AI), while also hosting mature, profit-generating companies with proven business models, supported by robust financial standing and reliable markets (e.g. healthcare)11.

Almost one-third of experienced investors12 express interest in European equities as a means to balance and spread risk across different markets, industries, and sectors. In addition, global indices such as MSCI World and FTSE World serve as a good example of what a diversified portfolio could look like. The MSCI World Index represents over 1,500 mid- to large-sized companies from over 20 countries and its share of European equities is at almost one-fifth of the total market capitalisation of underlying equities. 

Similarly, the share of European equities in the GDP-weighted FTSE World Index (consisting of over 3,000 securities) is at 20%. Just have a look at the charts below…

What’s next?

The low-entry barriers due to familiarity, diversification benefits, access to Europe's economic strength, and the potential for growth in emerging sectors make European equities a must-have in any comprehensive investment offering. 

The untapped potential of European equities is not news for those fintechs which are actively listening to their end users. Many financial and investment companies have already taken advantage of the opportunity as a way to differentiate themselves in a crowded market.

For instance, the social broker Shares is increasing its asset scope to serve a broader range of users as they expand from the UK to continental Europe. The global financial super app Revolut is also extending its offering to enable its +30M users to invest in fractional ETFs and European equities. Both companies grew their offering via Upvest’s plug-and-play investment API, which covers everything from brokerage and settlement to custody.

Are you interested in increasing your user base by diversifying your investment offering? Get in touch with our experts to find out how Upvest’s API-first solution can help you reach new audiences and expand to new markets without having to navigate the complex world of European licences.

Disclaimer: The content provided in this article is intended for educational and informational purposes only and should not be construed as financial or investment advice. Always conduct thorough research and seek professional guidance before making any investment decisions. The past performance of any investment does not guarantee future results.

Sources:

1. Trade Republic: Hype or New Normal? Insights into the motives and behavior of a new generation of investors. DIW Econ (2022)

2. Robinhood: Newsroom (2020)

3. Finimize Modern Investor Pulse (Q2 2023)

4. World Economic Forum in collaboration with Accenture and BNY Melon. The future of Capital Markets: Democratizing of Retail Investing (August 2022)

5. Gallup (2023)

6. Financial Times (2021)

7. Forbes: Three Behavioral Biases That Can Affect Your Investment Performance. (2011)

8. Brand Finance: Global 500 2023. The annual report on the world's most valuable and strongest brands (2023)

9. Goldman Sachs (2022). Data based on Stoxx Europe 600 and S&P 500 companies (as of Dec 2021)

10. Analysis based on FTSE All World Constituents Data (April 2023)

11. BlackRock (2022)

12. E*TRADE from Morgan Stanley StreetWise Report (2022)