While Europe continues to grapple with the economic wounds stemming from the Russia-Ukraine war, investors should be aware of the healing signs that build a good case for equities .
“The eurozone’s resilience, including its weathering of the energy crisis last winter, continues to be underappreciated,” said Simona Mocuta, chief economist at SSGA.
Reflecting this is the 3.4% real GDP growth last year in the face of predictions of a recession. Further, the 0.3% expansion during the second quarter of 2023 has pushed forward the onset of any potential recession, she added.
Concerns over energy security that were highlighted by the Russia-Ukraine war showcase some of Europe’s resilience.
As of August 2023, for example, Germany’s natural gas storage stood at over 93% of capacity. A year before, it was 81%, notably higher even than the 55% in August 2021, before the war.
“While it is an inconvenience and an investment commitment to diversify either the geographical source or the compositional structure of energy supply, this effort is already underway and will continue to make progress,” explained Mocuta.
Keeping tech in check
In assessing the investment case for European equities, SSGA also suggests investors look past the fact that there are few competitive tech players among Europe’s publicly traded companies.
The Bloomberg World Technology Index, which includes roughly 150 firms, contains only nine European companies, which make up just 5% of the index. If the e-commerce, streaming and social media giants of the US and China were to be added, Europe would be even more poorly represented.
Jeremiah McGuire, market positioning at SSGA, pointed out that this shortfall of tech leaders in European indices has led to notable periods of underperformance versus US equities. In 2020, Europe underperformed the US by 24% in local currency total return terms. And in 2023, Europe has lagged by 8.5%.
Yet tech is not the only sector to focus on. “Instead of fretting over a lack of technology leadership in Europe, investors should use periods of technology exuberance to shift their attention to the many sectors in which world-beating European companies are dramatically overrepresented and can easily drive Europe to global outperformance,” added McGuire.
A stronger case for European equities
In particular, the technology-led outperformance that has dominated the global investment landscape has masked the fact that Europe continues to dominate multiple sectors that deserve attention.
Across the board, European equities have outperformed US peers by over 10% and global peers by 8.5%, in local currency total return terms, since the end of 2021.
“Looking forward, our tactical signal suites highlight that in terms of earnings and balance sheet quality, as well as valuations, Europe shines versus its global peers,” said McGuire.
At the same time, he explained, investors should keep in mind that with respect to valuations, a company or sector can quickly become a poor investment once the value of its assets and speed of its growth are widely appreciated.