As a big Chelsea fan, this is one of the few football seasons in the past couple of decades where I am glad to see the back of the Premier League. Thankfully, this week saw the start of Euro 2024 – with 24 of the biggest nations across the continent battling it out over the next month or so.
Expect anthems like Football’s Coming Home or World in Motion to be on your TV screens and in bars and pubs across the land, amid the hope that England can finally end 58 years of pain (good luck to the Scots too by the way).
Despite reaching the final last time, the Euros have never been kind to England (I still have flashbacks to Euro ’96); it really is the hope that kills you when it comes to football tribalism!
Anyone who has invested in European equities for the past 15 years will know what it is like to live in hope. The truth is that a stigma remains over European equities since the global financial crisis.
In the past 15 years, the S&P 500 (the largest US companies) have returned more than three times that of European equities (source: FE Analytics), as the likes of the Sovereign Debt Crisis and the political pain that was Brexit hung over the economy.
The sectors that dominated many of Europe’s successful industries also lagged. The sector composition of European equity indices leans towards financials, energy, industrials and mining. The introduction of zero or negative interest rates to counter deflation risks caused banks’ returns to plunge, and Europe’s benchmarks were sadly lacking in the tech stocks that global investors craved for, in a world in which growth was scarce.
Today’s concerns are more around geopolitics, notably the ongoing wars. But are we now at a point where the region has become an attractive opportunity? Europe has seen a recovery of sorts in recent times. Incremental improvements in the macroeconomic picture, helped in part by lower energy costs feeding through to lower manufacturing prices, and the near-term prospect of interest rate cuts.
In the past 12 months, European equities have actually returned almost 16% to investors, beating almost every other major market, apart from the US (source: FE Analytics). Crucially, there is scope for this to continue from this point.
A recent update from Morgan Stanley says Europe has just enjoyed one of its strongest earnings seasons in several quarters – while it also feels the market is underappreciating a number of significant thematic tailwinds that benefit the region.
These include rising corporate confidence, a merger and acquisition cycle recovery, rate cuts (cuts are good for growth, with the US less likely to cut imminently), companies buying back their own shares (a strong indication that they believe their shares still look very cheap) and underappreciated AI diffusion.
Potential of the GRANOLAS
Morgan Stanley goes on to cite the likes of software, aerospace and defence, pharmaceuticals, semiconductors and banks as areas it sees potential in.
Investors tend to forget some of the strong trends that sit behind European equities. It is the leader in the green economy and luxury brands (China is a big purchaser of its goods) and also home to a number of great companies, with a global footprint. Take the GRANOLAS as an example – (GlaxoSmithKline, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP, and Sanofi) – these are among the largest and most valuable companies in Europe.
Comparisons have been made between the GRANOLAS and the so-called ‘Magnificent Seven’ – US stocks that have been driving stock market gains in that country, though many experts would add that the GRANOLAS still appear much cheaper than their US rivals.
Europe looks like it is finally emerging from its long slumber. The recovery has been broad in terms of sectors, but has been driven by many of the larger players in the market. Could it be that after many painful years, investors and football fans alike could be celebrating all things Europe in the coming months and years?
Those wanting exposure to some of the large companies, with a global footprint, might want to consider the likes of the BlackRock Continental European Income fund, which has major players like pharma firm Novo Nordisk, tech chip maker ASML and luxury product provider LVMH in its top 10.
Another to look at is the European Opportunities Trust, a high-conviction portfolio managed by experienced stockpicker Alexander Darwall.
Alternative options for investors include the WS Lightman European fund, a contrarian fund that targets undervalued (cheap) sectors using academic research to support its process. Those looking for hidden gems in Europe may also look to the Jupiter European Smaller Companies fund.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
