What does the fluctuation in the stock markets mean for European investors?

Nick Saunders writes that gradually investing in various quality companies could be a wise approach.

Confidence is the engine that drives stock markets upward. At the center of confidence are management, markets, and rational policymaking. The extreme volatility in the markets underscores the crisis of confidence among European investors, but this recent turbulence also presents opportunities. Short-term fluctuations may unsettle investors accustomed to predictability, but they also provide entry points into undervalued sectors. In general, there has been a trend towards U.S. stocks in the past decade, resulting in damage to valuations in the UK and Europe. However, among investors struggling with the unpredictability of U.S. markets, there is a growing tendency to refocus on local markets. Much has been written about the rise of European defense stocks - BAE Systems, Thales, Rheinmetall - but defense sectors are also on the agenda. Giant healthcare companies like Novo Nordisk, AstraZeneca, and Roche offer stable earnings and less sensitivity to economic cycles. Nestlé, Unilever, and L'Oréal provide stable cash flows and some cushioning against fluctuations.

Gradual investment is characterized by uncertainty in some sectors due to concerns that tariffs on Chinese production will lead to dumping of goods in Europe. The exclusion of Chinese electric vehicles from the U.S. market presents opportunities for VW, BMW, and Stellantis, while BYD and Nio will likely need to find alternative markets. While stock selection is important, as investors become more risk-averse, trust in stocks diminishes, and they position themselves opportunistically to buy at the bottom, market volatility has led to an increase in cash assets. Bank deposits, as well as money market funds, are likely to benefit from this. So, what should investors do? While holding assets in cash may be a great insurance policy in the short term, it is a poor investment in the long run. Gradually investing in various quality companies could be a wise approach. Preferring collective investments over individual stocks and balancing higher-risk investments with more ordinary options can help smooth out the bumps along the way. Nick Saunders is the CEO of the investment platform Webull UK.