It would be fair to say in the last five years or so the European economy has hardly had a great press nor been high on investors’ buy lists. The seemingly endless Greek debt crisis, very high youth unemployment in southern Europe, issues with Italian banks, political woes and now a fractious divorce as the UK exits the EU have all resulted in weak economic growth and uncertainty. It was therefore of interest to hear two fund management companies broadly expressing positive noises about Europe with the most upbeat message coming from Hector Kilpatrick, the Chief Investment Officer for Cornelian Asset Management and his colleague David Appleton the Investment Director.
The webinar I attended highlighted concerns with the US economy and markets. Essentially valuations are very high compared to history, corporate debt has risen sharply, interest rates are expected to rise, volatility is low and business confidence is very high with a potential for disappointment. The case for Europe is more interesting. Compared to global equities, European shares have fallen significantly since the financial crisis whilst on a historical basis European equities are not especially expensive. Moreover less expensive value companies are more represented in the Stoxx Europe 600 Index compared to the S&P 500 Index which holds more defensive growth stocks for example healthcare, utilities and staples. In addition there has been a sharp rise in the Citi Economic Surprise Index for the Eurozone since September 2016, a sign that the economy is improving faster than expectation. However the most interesting data for me from an investment perspective was that company earnings have been rising in Europe but declining in the US since October 2016. Earnings growth is a big driver of equity returns.
My conclusion is that dismissing Europe as a basket case would be wrong. Aside from the comments above Europe has always been home to excellent global companies with strong overseas earnings, not dependent on sclerotic domestic economies. So there may be an opportunity here.
This blog post is my own assessment of Cornelian Asset Management’s views. Nothing in this article should be construed as investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.