Europe: reasons for optimism...and caution
Martyn Hole
Equity Investment Director
  • The economic recovery in Europe is well under way, and equities have recorded strong gains for the year to date.
  • However, we may see slower growth ahead.
  • Despite the uncertainties that persist, select companies may hold attraction.

In this paper, investment director Martyn Hole explains why the backdrop for Europe looks increasingly positive, but there are risks that warrant caution. He also shares his view on which sectors have the potential to benefit from this environment.

Europe has bounced back so far this year

The European economic recovery is well under way: gross domestic product (GDP) growth in Europe’s major economies was stronger than expected over Q2, notably in Italy and Spain. As European economies are opening up, services activity has recovered sharply, boosted by mobility restrictions easing. This is particularly important for economies such as Spain and Italy that are reliant on the tourism/hospitality industry. Manufacturing activity also continues to expand, powering recovery in the eurozone. Capital Group economist Robert Lind believes Europe’s major economies could regain their pre-pandemic GDP levels earlier than expected.

GDP forecasts for Europe’s major economies1

For Illustrative purposes only

With governments protecting household incomes and consumers unable to maintain their usual levels of consumption, saving rates have jumped. This could trigger a release of pent-up consumer demand, benefitting many companies. We are starting to see early evidence of this with retail sales and consumer confidence becoming more buoyant.

Amid the greater optimism about an economic recovery coupled with strong corporate earnings, European equities have recorded strong gains so far in 2021. The MSCI Europe Index has delivered seven straight months of positive returns, rising nearly 20%2 in euro terms for the year to date.

Past results are not a guarantee of future results.

The M&A market in Europe is buoyant

M&A activity has always been affected by global trends and as such, the early days of the COVID-19 pandemic had a considerable impact on the M&A market, driving the number of deals down. Prior to this, European dealmakers were navigating the uncertainty around the UK’s withdrawal from the European Union, causing the M&A market to slow in 2019.

European M&A deal count and value4

As the global economy returns to growth, many companies are seeking to reposition themselves for future growth and investors are looking to put high levels of capital to work. This, coupled with low-cost financing conditions has resulted in a sharp uptick in M&A activity. Global M&A activity hit an all-time high in the first six months of 20213, with Europe notably recording a significant increase in deal flow. Volumes in Europe have been driven up by deals across a range of industries, while on a country basis the M&A appetite in the UK is strong given much of the Brexit uncertainty has been lifted and a number of UK stocks still appear to be undervalued.

Highly sought after deals have commanded a premium. For example, Meggitt, the UK aerospace supplier, became the subject of a bidding war after receiving a takeover approach from US competitor TransDigm, and also from Parker Hannifin. Both firms offered a significant premium to buy Meggitt and it would represent the largest-ever takeover by far for either of its would-be acquirers. 5


1. As at August 2021. Sources: Bundesbank, INSEE, ISTAT, INE, CG predictions.

2. As at 30 August 2021. Source: MSCI

3. As at July 2021. Source: EY

4. As at 30 June 2021. Source: Bloomberg Mergers and Acquisitions

5. TransDigm has since confirmed it would not proceed with a firm offer for Meggitt.


Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Martyn Hole is an equity investment director at Capital Group. He has 40 years of investment industry experience and has been with Capital Group for 19 years. He holds a master’s degree in natural and engineering science with honours from the University of Cambridge. He also holds the Chartered Financial Analyst® designation. Martyn is based in London.

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European Equity

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.