Interview
The Future of European Equities
- European GDP levels are expected to remain below 2019 benchmarks until the end of 2021 in Germany and 2022 in the UK, Spain, and Italy, with higher unemployment likely persisting for an extended period.
- The market is projected to absorb new debt and equity issuance effectively, while price levels are unlikely to fall below March lows unless a severe second wave of the virus triggers broad lockdowns.
- Future returns are characterized as "fat and flat," indicating a "fat and flat" range with wide variability and potentially positive but modest gains over the next two years and the subsequent decade.
- Valuations are currently at the upper range limit, subject to a ceiling imposed by zero interest rates, already implemented easy monetary policy, and elevated PE ratios, which preclude an "incredibly strong secular bull market" over the next 10 years.
- Investment strategies are expected to favor "alpha" over "beta," with growth factors anticipated to maintain outperformance over value factors throughout the next decade.
- While a rotation toward cyclicals and value may extend into the second half of the current year driven by strong sequential GDP growth, a sustained reversal of the growth-preference trend is not expected beyond the near term.
- The value factor is projected to remain a longer-term underperformer overall, though opportunities may exist in companies capable of mutating, such as oil firms transitioning to energy and automakers shifting to green investments.
- The EU recovery fund is deemed "incredibly important" for European markets, financing transfers from northern to southern Europe through future EU budgets with no repayment obligations required until 2028, potentially outweighing the impact of ECB policy.
- European companies with exposure to the digital economy are expected to continue performing well despite trading at a discount to Nasdaq peers.
- Renewables companies are forecast to deliver growth superior to the broader European market over the next few years, while fiscal infrastructure sectors—including construction materials, rail capital goods, and tech firms with government exposure—are expected to perform well if fiscal spending resurges.