The fund manager’s view
Eloise Robinson, lead manager, Columbia Threadneedle Investments
So far, it has been a positive year for equity markets on an absolute basis, Europe included. We went tactically overweight European equities towards the end of July, given attractive valuations, their cyclical nature and the expectation of falling inflation and rate cuts leading to real wage growth, hence increased consumer confidence and spending of accumulated savings.
While the environment for equities seems benign at present, looking ahead to the year-end and beyond, we see some potential headwinds, namely lofty earnings expectations for 2025, with some specific risks to Europe from a macro and geopolitical perspective.
First, and most timely, is the US presidential election. At time of writing (October 2024), Donald Trump’s odds have been improving of late and were we to see him win a second term, we would expect the proposed tariffs to weigh on European equities. That being said, a Trump victory could slightly increase the chances of a ceasefire in Ukraine, which would likely benefit European equities.
Europe is comparatively exposed to Chinese growth and the consumer. While there has recently been some stimulus measures from the Chinese government, further sustained improvement in the growth outlook for China is required to offer a meaningful support to European equities.
More broadly, the economic backdrop in Europe remains poor, with weak manufacturing data – led by Germany – and services PMIs remaining sluggish. Relative growth under performance compared with the rest of the world poses the risk of this malaise feeding through to earnings.
That said, many of these headwinds are well known by the market, leading us to believe much of this negative sentiment is already reflected in the price. In addition, the makeup of the European index is skewed towards quality companies with longer-term growth prospects. As a result, we continue to hold a small tactical overweight to European equities.
The economist’s view
Yvan Mamalet, senior economist and strategist, SG Kleinwort Hambros
European equities have markedly underperformed global markets during the past several months, held back by lacklustre corporate earnings, political uncertainty in France and a fragile economic environment, not least in Germany. Plans for Germany, France and Italy to tighten their fiscal policies next year have certainly added to the noise.
Beyond these cyclical developments, as former Italian prime ministers Mario Draghi and Enrico Letta recently highlighted in their respective reports, the EU faces a host of structural issues such as an ageing population, low productivity gains and an innovation gap with both the US and China.
Given these challenges, is it worth considering investing in European equities? We believe the answer is yes, for several reasons.
First, European equity markets are cheaper than most other major markets. Second, the European Central Bank (ECB) has embarked on an increasingly steep easing cycle: having already cut interest rates by 75 basis points, the ECB could ease by another 25 in December and possibly another 50 by March next year.
Third, the euro area economy has been flirting with a recession for a long time but may still avoid one. Even if one were to materialise, it would likely prove shallow, given the sound corporate and household balance sheets.
Lastly, European equity markets include many large multinational companies, with close to half of the sales and earnings of European stocks coming from overseas. European equities should therefore continue to benefit from the strength in the global economy – not least that of the US.
As a result, we are optimistic that European equities have the potential to perform well heading into 2025.
The fund selector’s view
James Davies, investment director, Close Brothers Asset Management
It has been difficult of late for active managers to beat the wider European indices as the best performance has come from a small number of large-cap stocks. That said, with many European companies now trading at a discount to their US peers, we do see opportunity within Europe, albeit with some caveats.
There can be reasons why European companies trade at a discount, and even with market-leading companies such as Novo Nordisk and ASML, recent share price performance shows that such stocks are not immune to disappointment.
Europe has also traditionally been a high-beta play on global growth, and with recent data in this area being mixed, Europe could still be a challenging place to invest. This cyclicality can be seen with another large European company, LVMH, which has recently disappointed.
The final reason is that when it comes to politics, Europe often struggles to get its own way; such as the surprise French parliamentary elections this year.
In short, a heavy overweight to the region would suggest either a very positive view on global growth or a desire to be highly overweight value, neither of which is true at the moment. Instead, we have a cautiously positive view, wanting exposure to different areas of the market.
Our core holding in Europe is the Liontrust European Dynamic fund, which has a disciplined investment process of equally weighted positions. We have also recently added the White Fleet Divas Eurozone Value fund, which is a Luxembourg Sicav and takes a value approach – along with a concentrated high active share. The fund has outperformed the European index and the Nasdaq since the pandemic low (to end of September 2024).
The wealth manager’s view
Nina Stanojevic, senior investment specialist, St. James’s Place
As we approach 2025, the outlook for European equities (ex UK) remains broadly positive, particularly following the ECB’s initiation of interest rate cuts. Lower rates should provide a supportive backdrop for growth and consumer spending, and European companies are well positioned to benefit. While valuations are not as low as in the UK market, European equities still seem attractive, especially versus US equities, where valuations remain elevated.
Europe’s sectoral composition adds another layer of appeal, particularly for those seeking diversification. Unlike the UK, which is more concentrated in financials and energy, Europe’s broader exposure to industrials, healthcare and consumer discretionary sectors may offer investors opportunities to benefit from a more balanced market recovery.
Historically, Europe has outperformed global equities at various points, which underscores its potential in a global portfolio context. While UK equities have had stronger historical performance, Europe’s track record remains impressive and contributes to the case for allocating capital to the region, particularly as interest rate cuts begin to ease financial conditions.
Moreover, while headline valuations for European equities may not seem particularly cheap, the underlying market offers notable dispersion. This creates an attractive environment for active management, allowing investors to capitalise on differences in sector and company performance.
With this divergence in market behaviour, skilled managers can potentially identify high-quality businesses or sectors that are poised for stronger growth in a post-rate-cut environment.
In summary, the combination of improving macroeconomic conditions, favourable relative valuations and opportunities for active stock selection supports a positive outlook for European equities as we head into 2025.
Read the rest of this article in the November issue of Portfolio Adviser magazine
