Europe has quietly delivered impressive performance in the stock market this year, with the median European stock outperforming its peers across other major regions. While the headline index performance has been more mixed, the fundamentals of European companies have shown significant improvement, particularly in terms of return on equity (ROE). In fact, European ROE now trails only the US, making it an attractive investment opportunity.

One standout performer is European banks, which have significantly outperformed the Mag 7. This strength is backed by improved fundamentals, including increased efficiency and better asset quality. However, there is a structural risk that cannot be ignored – competition from China. While exposure to China may seem concentrated in certain sectors such as autos and chemicals, the impact on the broader index is relatively limited.

In fact, higher energy prices could provide a tailwind for several major European sectors, including Energy, Utilities, Basic Resources, and Chemicals. This could potentially offset any negative impact from China competition.

Overall, Europe’s hidden strength in the stock market makes it an attractive investment opportunity, particularly for those looking to diversify their portfolio. By focusing on fundamentals such as ROE and identifying sectors that are less exposed to China competition, investors can potentially benefit from this undervalued region.