Europe has an image problem, says Niall Gallagher, who runs a range of European equity funds at GAM.
He says investors are treating European equities as though the companies are the same as the economy, and the market perception is that the eurozone economy is structurally unsound.
Hugh Cuthbert, who runs the European equity fund at SVM, says stocks listed on markets within the eurozone area always trade at an “inherent discount” due to a widely held view that the euro currency is unstable and will collapse.
The existence of the euro means economies that are at vastly different stages of their cycle will have the same interest rate, so some economies could have rates higher than their economies would justify, while others would have rates lower than ideal for their economies.
This could create a conflict whereby some countries want rates to rise, and others want rates to fall.
In the event of a subsequent recession, the risk is that membership of the euro becomes a source of discontent for populations, increasing political risk in a way that could pose a risk to asset prices across the economic bloc.
Key Points
- There are questions over whether European equities are well placed for the changing world, post-Covid
- Some investors are dubious about the viability of the eurozone
- Luxury goods is an area of strength for Europe
The second reason the image of the eurozone may be impeding the progress of its equity markets is a growing belief among investors that European equity markets are stuffed full of the sorts of companies that will fall from favour as the world embraces new ways of working, communicating and socialising, and companies that are likely to be hard hit by any pandemic-induced prolonged recession.
Examples across both of those trends include banks, big oil companies and traditional automakers, all sectors that are significant parts of eurozone stock markets.
Energy theme
In contrast, there is a lack of global leading new technology companies, the sorts of businesses that are likely to be winners from the changes sweeping the world.
James Sym, European equity fund manager at River and Mercantile, says that while the economic bloc lacks technology champions, it is a world leader in some of the environmental sectors.
He says: “One of the significant themes of the future is energy transition, as the world moves away from fossil fuels, and this is an area where Europe really does have world leaders.
“Orsted is an example of a leading company in this area that is European in origin. And while the theme of energy transition is just as significant as many of the themes large technology companies are part of, they have valuations that are much cheaper than those of the big tech names.”
Mr Cuthbert is also keen on this theme, and says the value comes from many of the renewable energy assets in Europe being owned by traditional energy companies, which the market ignores as being part of the old economy. He says this makes the shares more attractively valued.
