Between 2011 and 2019, continental Europe could hardly show any earnings growth as a result of the financial crisis. However, equity markets are being fueled by earnings growth, which is why interest in the European market has fallen sharply. In the meantime, however, the European stock market is said to be in transition.
• EU initiatives drive European stock market
• digitalization and climate change in focus
• European equity market is more global
EU initiatives
The European stock market has not really been able to convince investors for some time. The market is too cyclical, value-driven, an old economy, reports Institutional Money. However, Paul Wild, senior fund manager at JO Hambro Capital Management, said it was time for a rethink. The reason for this are burgeoning thematic opportunities in continental Europe, which would arise primarily as a result of the latest EU initiatives and the internationalization of the stock exchanges. European stocks have thus moved back into the focus of investors. “If analysts and investors have overlooked Europe for years, now is the time to look again,” Wild said, according to Institutional Money.
Post-pandemic earnings growth has bounced back significantly, dwarfing US and global growth until recently. This is mainly due to the fact that high-growth sectors such as technology, healthcare and luxury goods now make up a significant part of the MSCI Europe ex UK index. The lead that slower sectors of the “old economy” had continues to decline, Wild said.
Since June 2009, the index’s share of healthcare and technology stocks has risen by 7.3 and 4.7 percent, respectively. Financial and telecommunications stocks fell by 7.2 and 4.6 percent, respectively. As a result, of the ten stocks that had the highest market capitalization within the index in 2009, only two remain in the top ten: Nestlé and Roche. These changes in the index would indicate that it is now generally showing higher natural growth than before, the expert said. This in turn improves the prospects for increased earnings growth in the future and a higher return on equity. In addition, the index will be less cyclical as the higher-growth sectors tend to have stronger structural underpinnings.
Themed Europe
A “big change” is also underway in continental Europe: Europe is becoming more issue-oriented. This is explained using the example of the environment. In 2019, for example, the EU Green Deal was signed, the primary goal of which is to make Europe the first net-zero continent by 20250. The REPowerEU initiative also followed the Russia-Ukraine conflict. The energy requirements of the EU should become self-supporting. In addition, more should be invested in renewable energies.
The nature of these grand goals and investments inevitably means that they impact every sector of the economy. However, this is not just about reducing CO2 emissions. The initiatives are changing the EU’s fundamental growth trajectory and positioning the trading bloc as a global leader in environmental technologies. Fund manager Wild notes, “From an investor perspective, this is a multi-sector thematic opportunity with the potential for years of high returns; not how many analysts have described the region over the past decade.”
The Schneider company, for example, is a pioneer of the European Green Deal. The company expects global power consumption to quadruple between 2020 and 2040. Schneider’s EV charging and heat pump solutions would help accelerate this energy transition. Another good example is RWE. The company continuously continues its transformation into a major player in the field of renewable energy and contributes significantly to Germany’s goal of covering 80 percent of its energy needs from renewable sources by 2030. In addition, the company is increasingly distancing itself from its past in the lignite industry.
digital transformation
In addition to the environment, another focus of the EU is digital change. The EU economic stimulus program “NextGenerationEU” launched in 2020 includes, for example, EU-wide ultra-fast broadband, digital identities with better controls over personal data and greater use of artificial intelligence in the fight against climate change and to improve healthcare, transport and education. According to Wild, European pioneers in these areas include companies such as Cap Gemini and ASML. For example, Cap Gemini recently formed a groundbreaking generative artificial intelligence partnership with Google and continues to set standards for the digital transformation of companies. ASML maintains its dominant position in cutting-edge lithography, with global trends in the electronics industry supporting continued demand for its products. The relocation of semiconductor factories to company locations will increase demand in both Europe and the USA.
Global Orientation
The global orientation of European companies is also having a supportive effect. The ten leading stocks in continental Europe generated a full 74 percent of their earnings outside of Europe – and the trend is rising. For example, Novo Nordisk is now the third largest pharmaceutical company in the world.
“We see a likely mid-term re-rating for continental Europe that is largely being ignored – driven by the likely continued improvement in yields. Put simply, Europe is home to a growing number of great companies,” said fund manager Wild.
Editorial office finanzen.net
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