European equities remained out of favour in 2019, with vast outflows from investors.
The continent’s firms remain at the mercy of geopolitical tensions, including continued Brexit delays and the ongoing US/China trade war. Many European companies are highly reliant on Chinese exports, with China’s economic slowdown also squeezing firms.
Many wealth and asset managers had underweight positions in Europe last year, finding more compelling markets elsewhere. But are there opportunities to be had this year, or is it all doom and gloom?
Three industry pundits give their outlooks for the European equity market in 2020.
Will European equities remain unloved in 2020?
John Schaffer
jschaffer@citywire.co.uk
MARTIN SKANBERG
fund manager, European equities, Schroders
GROWTH RELIANT ON RETURNING INVESTORS
There were plenty of reasons to dislike European equities in 2019: trade wars, Brexit and weak economic growth to name just three. But that didn’t stop the stock market from rising.
The fact that eurozone shares have been unloved is shown by the significant outflows from the asset class in 2019. However, there are tentative signs of this starting to improve, with the pace of outflows slowing.
Even without help from monetary or fiscal policy, there are pockets of the European equity market that could do well in 2020.
Eurozone shares remain more cheaply valued than their US counterparts: the MSCI EMU is on a 17.5x price-to-earnings ratio compared to the S&P 500 on 19.1x (as at 29 November 2019).
HIGHLY VALUED STOCKS RISK FALLING OFF A CLIFF EDGE
Companies which offer growth, have defensive characteristics, and are perceived as low volatility have seen the market value of their shares increase very highly over the past few years, especially when compared with value stocks.
Food and beverage stocks are a case in point. Many stocks have become so highly valued that any growth disappointment leaves them vulnerable to a sharp market reaction.
The Q3 earnings season contained a few examples of defensive growth companies missing forecasts, with their shares being severely punished by the market.
By contrast, companies that are more sensitive to the economic cycle, especially those exposed to manufacturing, have become lowly valued by the market.
Ken Hsia
portfolio manager, Investec Asset Management
LAST YEAR’S SELL-OFF WAS UNFAIR
Last year saw some stocks and sectors sell off unfairly, creating opportunities for active stock pickers in 2020.
2019 was a good year for European equities, but this was largely driven by price-to-earnings multiple expansion rather than improved company earnings growth.
Companies had only managed to grow their earnings by 1% on average over 2019 – a much lower figure than the gains made by stock markets over the same period.
RETURNS HARD TO FIND
It will be hard for returns to continue to rise in the absence of stronger earnings growth and we expect European stock market performance to look more balanced in 2020.
We expect the economic impact of Brexit and US/China trade war to be resolved, or at least clearer, in 2020. This creates room for any positive signs around company earnings to lift equity market returns.
Relative to the US and China, exports play a greater role in European economies – making cyclical companies in Europe particularly sensitive to trade-related uncertainty.
Valuations are currently discounted to reflect the current trade tensions. Should improving trade dynamics feed through to higher earnings expectations, we see significant potential for stock price rises.
While we have reflected this in our current positioning, such as in financial and semiconductor stocks, we will continue to be on the lookout for new ones. Recently, we have noted some potential in a few automotive and building material names.
JEFFREY SACKS
head of EMEA investment strategy, Citi Private Bank
POSITIVE EQUITY VIEW, BUT HIGHER VOLATILITY
Europe ex-UK economic growth should stabilise and possibly strengthen after a 1% rise in 2019.
While fresh monetary stimulus from the ECB may not be enough to drive companies’ desire to borrow and expand, its new chair Christine Lagarde may add to the pressure for eurozone economies to pursue more fiscal stimulus.
European ex-UK equities look attractive in both relative and absolute terms. They trade on an average multiple of 2020’s forecast earnings per share of 14.7x, while offering a 3.2% dividend yield.
We expect them to have another positive year of performance, after their 23% rally in 2019. That said, we see more modest total return upside potential and higher volatility in 2020.
BULLISH ON BANKS
Among national markets, we prefer Switzerland and Germany. Strong Swiss business franchises have substantial pricing power, while Germany could benefit from a rebound in industrial activity.
Among sectors, we continue to like healthcare, which has strong demographic and technological drivers. We also favour banks, whose cheap valuations reflect sluggish loan growth.
A key risk to European ex-UK equities is further trade war escalation with the US. However, we think this risk may be contained as the US presidential election draws near.
We will also be closely monitoring Italy’s key vulnerabilities of high national indebtedness and a weak banking sector, which could be aggravated by falling growth.
Overall, we expect a 9% increase in Europe ex-UK earnings per share in 2020, with further significant downward revisions unlikely. High dividend yielders and dividend growers could do well as fixed income yields continue to decline.
A new initiative for a new decade
Wealth managers bet on post-Brexit bonanza
The (mispriced) risks that all asset allocators are facing
Investing in 2020: The big calls
The real Brexit battle has only just begun
Will European equities remain unloved in 2020?
Have the US tech giants had their day?
The bond conundrum
Emerging markets: selectivity is the key
Can ESG investing continue to grow?
Is value poised for a comeback?
Black swans 2020
Will the passive flows cascade into a new decade?
Why portfolio managers are hoarding cash
The world in 2020 roundtable: ‘I’ll be delighted to get CPI plus three’
The world in 2020 roundtable: the yield battle in bonds
The world in 2020 roundtable: the big mistake investors must avoid