Save, make, understand money


BLOG: Can European equities finally shine?

Paloma Kubiak
Written By:
Paloma Kubiak

‘Get Brexit Done’ – it was the simple, yet brilliant, slogan which won Boris Johnson a significant majority in the December 2019 general election.

The optimists amongst us hoped the news would clear the malaise of Brexit and ease some of the political uncertainty, which has clouded investor sentiment in recent years.

However, for much of last year, Brexit became secondary to the threat of Covid-19 – from an economic and healthcare standpoint.

An eleventh-hour deal was struck, however. And, aided by the vaccine roll-out, the impact of a Brexit deal has already resulted in a rally in UK stock markets – something which is expected to continue in 2021.

But I believe the outlook for European equities is something investors could easily overlook to their own detriment.

It’s not just Brexit which has hampered Europe. The region has never really recovered from the global financial crisis in 2008-2009 – in terms of performance and sentiment.

In the past 10 years the MSCI Europe Index has returned 89%, comfortably overshadowed by the US, where the S&P 500 index has returned almost 300%.

Before I explain why I feel Europe offers promise to investors, I would want to point out it is still in the midst of a second lockdown – but with a vaccine bounce there is cause for optimism.

One of the reasons I believe Europe has the potential to perform strongly in 2021 is that we should see a general broadening out of the economic recovery beyond the growth companies in sectors like technology.

This broadening could see the eurozone outperform the US next year as we could see significant improvement among undervalued cyclical companies – firms that are more reliant on the health of the economy and an area Europe is more exposed to.

Europe also has a relatively high exposure to financial companies, an area that has been hit hard by low interest rates since the global financial crisis.

However, figures from MSCI Europe show the region has a more balanced look to it compared to a decade ago – with the likes of healthcare, consumer staples, industrials and consumer discretionary companies now accounting for more than 50% of the index.

Schroders senior European economist, Azad Zangana, forecasts growth of 5.2% for Europe in 2021.

He says forthcoming stimulus should help to support eurozone economic growth through 2021 and beyond.

There’s also hope on the dividend front for the likes of insurance and financial companies – which were forced to suspend payments last year.

The euro has also gained strength relative to the dollar in recent months, and there is a strong support plan on the agenda, which includes an accelerated move towards tackling environmental, social and governance issues.

Those looking to invest in Europe may like to consider a couple of strong active managers in the region, such as Mark Nichols and Mark Heslop, who manage the Jupiter European fund, a concentrated portfolio of 35-45 stocks.

Another is the European Opportunities Trust, managed by former Jupiter manager Alexander Darwall, who has an exceptional track record going back more than two decades in European equities.

Meanwhile, those searching for income may like the LF Montanaro European Income fund. Managed by George Cooke, it has a focus on small and medium-sized companies.

Darius McDermott is managing director of Chelsea Financial Services