The outlook for Europe

With the pandemic-induced shutdown of 2020 — which caused the worst recession since the Great Depression — behind us, solid growth is expected across major economies in 2021, according to the International Monetary Fund (IMF). 

In Europe, the IMF anticipates the economy will expand 5.2% in 2021, compared with a fall of 8.3% in 2020 . However, the prospects for Europe in the year ahead will depend on how quickly the pandemic subsides and the extent of further government fiscal support. With new lockdowns in place across some countries in the region creating uncertainty as to the timing of a return to growth, plus the rupture in the UK-EU economic relationship as a result of Brexit, investors may question the value of an allocation to European equities. 

Due to the global nature of select European companies, and attractive valuations compared with their US counterparts, we believe it is possible to find some interesting longer-term investment opportunities among Europe-listed equities. 

European equity valuations remain attractive

Since the 2008 financial crisis, European stocks have stayed relatively cheap compared to the US. Part of the strength in US equities has been due to the strength of the domestic economy, which recovered more quickly than other major world economies. A strong US dollar, political uncertainty elsewhere and trade tariffs have also been reasons for superior index returns from US equities.

 

Valuation differential between the US and Europe is driven by sector composition

Comparing US and European equity index results on the surface disguises some important details. European indices generally have a greater concentration of stocks in old economy sectors such as financials, materials and energy. Contrast that with the US, where technology and health care dominate. These latter sectors have rallied strongly and driven valuations higher. However, although European markets may not be heavily weighted with high-flying tech stocks, they have no shortage of market-leading companies.

 

Europe is a dominant player in certain industries

Around the world, certain countries or regions have become known as leaders in a particular industry. For example, while there are five major industrial robotics markets in the world (China, Japan, Republic of Korea, the US and Germany), Japan dominates the industry. It is the world’s number one industrial robotics manufacturer, delivering 52% of global supply in 2018 . It has driven the advancement of artificial intelligence and machine learning, which are essential to powering the new age of innovation in robotic hardware . 

 

 

1. Sources: International Monetary Fund, World Economic Outlook, October 2020. GDP figures for 2020 and 2021 are projections.

2. Cyclically adjusted P/E ratios are the index price divided by the average of the previous 10 years of inflation-adjusted earnings for the 10 years ending 31 December 2020. Source: Thomson Reuters Datastream 

3. Data as at 31 December 2020. Source: FactSet

4. As at 2018. Source: International Federation of Robotics. 

5. As at July 2019. Source: Rocketspace.com 

 

 

 

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.
• Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.