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Why it’s time for a fresh look at European equities

  • European bourses have long been seen as less attractive equity markets
  • Led by banks, many stocks in the region now look undervalued.
  • Growth in Europe expected to continue way above trend until beyond 2023.

IT’S BEEN a while since Europe excited global equity investors. For most of the past few decades, there’s always been something a little more exciting – the US, emerging economies, private markets.

But as the world emerges from the COVID pandemic, there’s a whiff of excitement about European equities. And that provides opportunity.

“In my world – continental Europe – earnings forecasts still look very much too low,” says Paul Wild, senior fund manager at JOHCM Global & International Equities. With second quarter earnings season only a fortnight away, Wild expects continued surprises vis-à-vis a year earlier.

“While it’s clear that peak earnings momentum has past, it is still going to remain positive. We could see earnings growth approaching 50 per cent for 2021. Also with European GDP in 2022 likely higher than this year, the earnings outlook stays strong”

Banks and financial companies, like most major markets, are a large part of European equities. But they are behaving atypically at the moment, and that could provide an opportunity.

“The story of European financials is not really yield curve driven at the moment. It’s more about the effects of coming out of the crisis, and that’s about normalising provisions,” Wild says.

Banks increased provisions for bad debts at the beginning of the pandemic, but as the macro environment turned out to be better than forecast, provisioning requirements have fallen. The banks are over-capitalised, Wild says, and that means big dividend payouts later in the year.

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The other factor for European (and global) banks is inflation.

“The commentary from the Fed a few weeks ago is far and away the key event of recent times,” Wild says. “The market was very much positioned … for the Fed to let things run hot. But the Fed’s dot plot effectively called for two rate hikes in 2023 – they were much more hawkish than what the market was positioned for. The yield curve flattened.”

The question is: has the market interpreted the Fed correctly?

“It’s very difficult for anyone to make a real call on inflation with absolute convictions at the moment given the transitory effects, given past mistakes it seems unlikely the Fed will be too pre-emptive” Wild says.

“Overall global valuations are pretty high at the moment, but Europe looks quite reasonable versus the MSCI World. Whilst bonds are still priced for the moon,” he says.

“If you buy a Government bond, in many cases you are committing yourself to a negative real return. So, then you look at equities and the cash dividend potential, particularly in Europe. It looks like growth in the region can stay sustainably strong until the back of 2023,” Wild says.

“For so long Europe has just been lacking in any positive theme, and that’s now changed as it emerges stronger from the pandemic.”

About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Pendal offers a range of global equities strategies to Australian investors including:

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here.

This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at July 28, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

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