Investors concerned about US markets potentially getting ahead of themselves may instead want to look at Europe. It is approaching an inflection point with the vaccine rollout, such as the expectation that one third of France’s population will have received their first jab by mid-May.

From experience in the UK, that’s the point at which the most vulnerable in society are being protected and therefore infection rates should go down. It bodes well for the reopening of the economy and raises confidence for a strong second half to the year.

At the same time, the news flow from many European companies is very encouraging, with many reporting a pick-up in earnings.

Nearly two thirds (62%) of European companies have beaten earnings per share estimates by 5% or more for their first quarter 2021 numbers, while 13% have missed, giving a strong ‘net beat’ of 49% of companies – a record breadth of beats on data back to 2007, says investment bank Morgan Stanley.

Names like logistics group Deutsche Post, car maker Volkswagen and luxury goods group LMVH are just some of the names surprising the market with better-than-expected figures in recent weeks. Deutsche Bank even reported its best quarterly profit for seven years.

Europe has outperformed the All-Country World index since February, yet there is little evidence of love for the region in a global context, says Morgan Stanley. History suggests it can pay to put money into unloved places.

‘While global equities have seen record inflows over the last three months, Europe’s relative flows remain at the low end of historical ranges. Relative valuations are close to 10-year lows, and even adjusting for sector composition Europe still looks cheap vs the All-Country World index,’ says Morgan Stanley

Fund manager Francesco Conte, who runs the JPMorgan European Smaller Companies Trust (JESC), says he has been picking stocks in this region for nearly 25 years and Europe has always been out of favour during that time.

‘Throughout that period, we had all sorts of disasters in Europe like the Greek crisis and election crises. Despite that, the European index for smaller companies has been one of the best indices in the world. It is full of entrepreneurs and innovation.’

Most of the big European stocks can be bought by investors on mainstream UK investment platforms and companies of all sizes can be accessed by the multitude of Europe-focused funds on the market, such as BlackRock European Dynamic Fund (BCZRNN3) which has delivered 18.2% annualised returns over the past five years versus 11.7% from the MSCI Europe Ex-UK benchmark, according to Morningstar.

Ultimately, investors need to sit up and take notice of the good news flow coming out of Europe, rather than simply fixating on what is happening on the UK and US markets. There are good investment opportunities out there and some are still cheap in relative terms.

‹ Previous2021-05-13Next ›