One week / one topic: The West and the rest

What happened?

US vice president Vance shocked many with his recent speech at the Munich security conference, laying bare the collapse of the transatlantic alliance.

The reaction from European leaders was typically uncoordinated – every single one of them remains much more focused on domestic consensus and being reelected – despite how harsh the message from the White House was.

It took Volodymr Zelenskyy to clarify what had just transpired: “The US vice-president made it clear: decades of the old relationship between Europe and America are ending. From now on, things will be different, and Europe needs to adjust to that.”

The only area of agreement? The urgent need to Make Europe Great Again, despite very different recipes to do so being suggested from the two sides of the Atlantic.

And yet – even after adding the most recent news to the perennial pessimism about the continent’s malaise – European stocks have been on a tear recently, visibly outperforming the S&P 500 and global stocks as well.

Looking under the surface, there are strong signs of life in European stocks as investor have been rewarding specific themes such as:

• Luxury goods, as Europe is still the clear global leader in the space

• Civil aerospace, as demand for aerospace and defense equipment is set to remain strong

• Italian banks, as lots of M&A has boosted share prices as the sector consolidate

What should investor make of all this? Is this just a flash in the pan, or a clear sign of further opportunities to outperform?

Our observations

• Fundamentals: European stocks remain cheap and unloved, two elements that usually skew the odds in favor of investors.

• Price action: While the recent outperformance is notable, the long-term context shows a very different picture.

• Investor beliefs: The bar remains high for (US) marginal buyers to step into the asset class… yet, questions are being asked.

So what?

Across portfolios, we have added to our European equities positions (with a UK tilt to boot!) since late November.

While the positive contribution of these holdings is already meaningful at the portfolio level – and therefore implicitly asking the question ‘should we take profits here?’ – we remain constructive.

‘US exceptionalism’ is the talk of the town, yet – not matter how justified the surrounding narrative – it does not necessarily mean that US stocks have to outperform forever and across all time periods.

Perhaps Europe will be forged in crisis once more… In the meantime, attractive investment opportunities remain available.

Mood music: Europe - The Final Countdown