These are difficult times. As human beings and as investors. In the last two days, we have seen clear signs of market dislocation in Europe. Europe is suffering from being physically close to Ukraine. This clearly brings greater economic repercussions, as well as fears of possible direct involvement. The attack on a Ukrainian nuclear power plant, followed by an exchange of threats between NATO and Russia, greatly increased market stress and led to an indiscriminate sell-off which, in turn, triggered technical selling in an equity market which, today, sees the prevalence of capital managers following quantitative, hence momentum, approaches. Europe had been a rediscovery area for US and Asian investors in recent months. In addition, Europe is a more traditional equity market than the US and is more exposed to companies that are sensitive to economic growth, which is now being questioned.
As we have repeatedly said, we believe that Europe is one of the areas where the best investment opportunities lie, not only in the short term, but also and above all in the long term.
War aside, Europe is in better shape economically than the US in the short term. In the US, consumer confidence is being severely affected by weak markets, rising interest rates and pressurised commodities. In Europe, consumers are less sensitive to stock markets, petrol prices and interest rates, which remain low here anyway. Europe is now emerging from the pandemic on the back of expansive fiscal policies, high private savings and a desire to get out, travel and spend. Funds for energy transition, digitalisation and infrastructure (NEXT Generation EU) are starting to be released. Corporate profits are growing and the financial system is very solid.
In the long run, we have already talked about how powerful trends are emerging in Europe that can cut through the strings that have kept the area under pressure. We are talking about fiscal policies that finally aim to unite the area and industrial policies that will lead to the return of manufacturing, agriculture and defence management within our borders, and, with them, investment and full employment. Of finally positive wage dynamics that will create demand for basic goods and services, as well as a revaluation of forgotten assets such as housing, the shed or land in the suburbs. Spreading the benefit of growth to all social classes brings enormous economic, financial and political benefits, moving us away from the dangerous nationalism that can lead to autocracies and conflicts.
Risks of nuclear conflict? We have learned not to rule out any hypothesis but, epicureanly, we believe that in the event of nuclear war, geographical allocation makes little difference. Having said that, we clearly consider this hypothesis to be extremely remote.
Fear of recession? As mentioned, NEXTGeneration EU funds are now being released and the release is likely to be accelerated (€7bn has just been paid to France and €21bn is expected to be released to Italy in weeks). The fiscal rollback, after the huge pandemic fiscal expansion, planned for this year will be delayed if necessary. Thus the roll off of QE. This, together with the post-Covid reopenings, will join the powerful European trends mentioned above. Once the acute phase of the conflict draws to a close and the perceived risk of its widening diminishes, Europe will return to its normal routine, which these days is at least slowed by the ongoing tensions. We believe that the acute phase will not last much longer.
Finally, pre-conflict European market valuations well reflected the social and political decay that decades of stagnation had created, offering substantial upside potential. Today, these potentials have risen sharply, courtesy of panic and flows linked to an exogenous event such as war.
We believe that the mighty US bull market has come to an end. The period in front of us has been compared by some, such as Michael Hartnett, Chief Global Strategist at BoA, with the entry into the 1970s, a period which with the current situation shared geo-political tensions, an oil crisis, a resurgence in inflation and valuations far removed from value and growth. The market moved sideways over the next ten years, but small caps and value did extremely well. Growth, which was starting from deep valuations and normally suffers from the liquidity squeeze associated with rising rates and the return of euphoria, did very badly.
Although we are suffering from a lot of volatility these days, we are happy with our overweight in European value stocks and believe that this phase represents an important opportunity for those looking to increase exposure here as part of their asset allocation.
Europe, now or never.Back