4Q 2020 Europe Equity Outlook: Growth Resumes, Slowly But Surely

Portfolio Manager Donny Kranson portends that investors can now choose from a diverse group of faster-growth, higher-quality companies in Europe.

After European governments succeeded in pushing Covid-19 infection rates low enough to reopen for the summer season, we are now seeing rates rise again. Going forward, we expect to see local lockdowns in hotspots, rather than countrywide stay-at-home orders, which should be better for the economy.

Companies most exposed to the effects of Covid-19, such as domestic travel and alcoholic beverages, have generally seen improving trends from April through June. There has also been steady improvement in other indicators including public transport usage, energy use, and hiring activity.

Europe’s relatively capable handling of the pandemic so far has contributed to a stronger euro. However, there is no structural reason why the euro should continue to strengthen versus the other major global currencies. Most central banks have shown their openness to using stimulus as needed. Meanwhile, Brexit lingers and the US will soon come through its election cycle.

Stock selection remains critical in today’s environment. Better companies with faster growth have been rewarded by the markets. As a result, some value from future growth may have been pulled forward, which could produce weaker returns over the next few years. However, companies that have not done so well may be structurally poor businesses, while others that have historically been profitable are now finding themselves in the eye of the Covid storm.

There are many European companies in the hospitality, travel, restaurants and beverage industries that should be less volatile in a typical recession. When the market normalizes, they may be long-term winners. Regardless of the current landscape, we believe investors can still find value in businesses with prospects for long-tail structural growth, strong balance sheets, and are trading at reasonable valuations.

European markets are significantly different today from a decade ago. Banks are no longer overrepresented versus global indices and technology (at 7.5%) is three times its size in 2010. Faster growth, higher quality companies have either come to market through IPOs or spun out of existing, slower growth businesses. Companies of the future, like Adyen in payment processing and Prosus in a wide variety of technologies, are now public and based in Europe. For quality growth investors, we believe Europe can offer a diverse group of companies from which to choose.

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