Netherlands, Institutional
Changechevron_rightSustainable Investing
Stewardship Principles
Investment Solutions
Funds
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
We’re in a period of significant regime change, and as a result, leadership in the European equity market could look very different over the next three to five years than it has since the global financial crisis and the opportunity for stock pickers to differentiate between winners and losers could be especially attractive.
To understand the current market environment, we first have to go back to 2021, when we began to see a fairly dramatic bifurcation in the valuations of European stocks — meaning extreme valuations on the high end but also on the low end. This is only half the story though. Valuations could, after all, carry on in that state for an extended period. The market was really waiting for the opportunity to unleash change, and now I believe that time has come — with the return of inflation and the rise in interest rates.
This new regime has created the potential for greater dispersion in performance throughout the European equity market and for more clarity about which stocks will be the new market leaders going forward. We have, of course, been through a decade in which technology companies, “disruptors” and the beneficiaries of cheap funding led the way. But we’re seeing clear signs of change — driven in part by the shift in the interest-rate environment, but also by accelerating growth in other areas, such as defence.
We’ve also seen a lot of investment in certain areas of technology, especially in software, where I think negative free-cash-flow generation will lead to underperformance among some stocks in the sector as investors focus more on profitability.
Importantly though, valuations haven’t caught up yet with these trends. We still see the same bifurcation in valuations that has been in place since the COVID era. What’s more, the process of valuation normalization could be a prolonged one. While it plays out, the combination of valuation extremes and an understanding of the ways in which company fundamentals are changing could be extremely powerful for stock prices, both positive and negative. I think this opportunity in equity markets will only be amplified by structurally higher rates in the bond market.
Against this backdrop, there are a number of areas I think are attractive. Let me highlight two:
Along with these potential opportunities, there are also areas where there will likely be an ample number of losers. Two examples, in my view, are the property and REITs markets in Germany and Sweden — two markets that would generally be considered fairly conservative, but where, for a variety of reasons, some companies have increased their debt pile in recent years and now find themselves in a precarious position.
There are, of course, broader risks in the region that we must consider. One is the possibility that we end up back in an environment similar to late 2020, including a return to very low interest rates. It’s also important to be alert to the potential for a big surprise in inflation, to the upside or the downside. Lastly, the recent energy crisis is worth considering, and in particular the potential fallout if we were to see a significant expansion of the war in Ukraine.
The bottom line is that Europe is a place where we have historically seen a great deal of bifurcation between winners and losers — across countries, sectors, and the region as a whole. In recent years, that changed as a smaller set of companies, particularly in technology, dominated, but I expect a return to a more diverse market with a very different level of dispersion going forward. Whenever the stocks that drive dispersion change, opportunities are abundant.
Expert
Monthly Asset Allocation Outlook
Continue readingMultiple authors
The power of local perspective: the long and short of European equity investing
Continue readingThe investment implications of Europe’s ageing workforce
Continue readingTime to capitalise on the evolving role of bonds?
Continue readingThe power of local perspective: where next for European banks?
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
You've been subscribed
Thank you for subscribing. You can manage your subscription using the links provided in any of our subscription emails.
Monthly Asset Allocation Outlook
Wondering how to reposition your portfolio amid election-related uncertainty? Explore the latest monthly snapshot of our Multi-Asset Team’s asset class views.
Multiple authors
The power of local perspective: the long and short of European equity investing
Dirk Enderlein and Boris Kergall explain why, in their view, the structural changes impacting European equity markets offer active long/short investors a rich source of potential return and diversification.
The investment implications of Europe’s ageing workforce
What are the investment implications of Europe’s ageing workforce? Macro Strategist Nicolas Wylenzek explores the drivers of this accelerating demographic shift, Europe’s likely response and the opportunities it creates for investors.
Time to capitalise on the evolving role of bonds?
We outline why we think the new economic era is elevating the role of bonds as a source of attractive and stable income, downside protection and portfolio diversification.
The power of local perspective: where next for European banks?
Global Industry Analyst Thibault Nardin explores how monetary policy divergence, technological disruption and sector consolidation are reshaping European banks, while creating potentially compelling opportunities for active investors.
European elections: all change for equity investors?
Macro Strategist Nicolas Wylenzek discusses how the elections for the European Parliament could herald significant change, with major implications for European equity investors.
Has the European credit cycle been extended?
2024 has kept fixed income investors busy. Yet, despite lingering inflation and rate volatility, European credit markets have remained strong. Are we looking at an extended credit cycle? And if so, what does this mean for investors?
Governments have been slow to reduce their fiscal deficits — it could cost them
Our expert explores the investment implications of continued excessive deficit spending by G7 countries.
Key factors to monitor in European equities
Macro Strategist Nicolas Wylenzek assesses the longer-term prospects of European equity markets through the prism of five key factors.
Bizarro World: Could 2024 be the opposite of 2023?
Fixed Income Portfolio Manager Brij Khurana details the dynamics that may upend investor expectations of a repeat of 2023 this year.
By
Long/short investing in European equities' growing dispersion
We explore how growing dispersion in European equity markets is driving opportunities for long/short investors, fueled by structurally higher inflation, changing market leadership, and a renewed focus on valuation.
URL References
Related Insights
© Copyright 2024 Wellington Management Europe GmbH. All rights reserved.
WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP.
Wellington Management Europe GmbH. Registered office: Bockenheimer Landstraße 43-47, 60325 Frankfurt am Main, Germany. T: +49-69-677761-500. VAT-number DE 326304943 (Umsatzsteuer-Identifikationsnummer) Commercial Register of the local court Frankfurt am Main (Handelsregister des Amtsgericht Frankfurt am Main), HRB 115460 .
Wellington Management Europe GmbH, is authorised and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht)
For professional investors and intermediaries only. This content is not suitable for a retail audience.
we’d love your feedback!
Help us improve our website. For every short survey taken, we give 2 to the Wellington Management UK Foundation to support educational charities helping economically disadvantaged children in EMEA.
