One week / one topic: Europe, land of opportunity

What happened?

While investors remain giddy about the prospects for US stocks and willing to pay sky-high valuations, the latest data point to a much more somber outlook for Europe:

• Manufacturing PMIs for Germany have been in a contraction for longer than ever before, and almost the longest for France

• Rates markets are pricing visibly higher recession odds for Europe vs the US (obviously…?) and even the UK

• The Euro just plunged below 1.05 vs the Dollar, breaking its 2-year range in about 6 weeks

Add to this the specter of tariffs from the Trump administration and military escalation in Ukraine, and you can easily see why more and more investors have been steering clear of European assets.

However, is this all overdone – or at least, priced-in already?

Is there an opportunity to invest in high-quality European companies as markets might ‘climb the wall of worry’, leading to less depressed sentiment and therefore higher prices?

Our observations

• Fundamentals: A number of European ‘global winners’ stocks trade at a significant discount vs US peers, possibly largely because of where they are listed… Markets might have already priced in most of the bad news.

• Price action: In common currency terms, European stocks have underperformed US ones by 15% over the last three months. That’s the second worst showing in 25 years; only the Dot Com bubble was worse.

• Investor beliefs: Investors have seemingly given up on European stocks, much like they did with Chinese stocks earlier this year… (and we know what happened there).

So what?

Both these statements can be true at the same time:

• Surely, Europe – and by extension, its companies – faces many serious challenges. Existential, even.

• (Portions of) the European stock market look attractive, as current prices might already discount too much bad news at this stage.

While we are under no illusions that Europe will somehow soon magically fix all its problems and catch up with the US and China on many fronts, our job is to assess whether current prices are attractive or not – sometimes on a relative basis, sometimes in absolute terms.

The famous Jean Monnet quote comes to mind, since it held true many times in the past – “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises.” – but this should not be an alibi to avoid digging deeper of course.

With that in mind, we are considering adding to our positions in (high-quality) European equities along with also increasing portfolio duration via a mix of long-dated G3 government bonds.

Even European champions like GRANOLAS* stocks have been left in the dust by the Mag Seven over the last 2 years, possibly creating compelling opportunities to take the other side:

*: GRANOLAS stocks: ASML, Astrazeneca, GSK, L'Oreal, LVMH, Nestle, Novartis, Novo Nordisk, Roche, Sanofi, SAP.

Without extrapolating too much from a single example, just consider that Airbus is trading at a ~40% discount vs Boeing – which has been in the news for all kinds of wrong reasons for years now.

Ask investors which airplane they’d rather fly on, and the answer is likely going to be inconsistent with their portfolio preferences…