Quality Growth Boutique

2Q 2021 European Equity Outlook: Poised for the Future as Europe Gets Back on Track

Outlook

Poised for the Future as Europe Gets Back on Track

Portfolio Manager Donny Kranson discusses opportunities and risks post-Covid, the importance of pricing power, and why ESG matters.

 

  • Some of the worst hit areas of the market – travel, travel-related businesses, and companies geared towards social interaction and live entertainment – have rebounded in the first quarter and many have a priced in a return to normal. There has also been a rebound in value stocks, such as energy and banks.
  • Investors should tread carefully with companies that have fast sales growth but no earnings, or valuations above 50 times trailing earnings. These types of companies outperformed the broader market in 2020 by a similar rate to what we saw in the late 1990s. While many of them are better than their tech bubble counterparts, valuations have gotten ahead of themselves.
  • As Covid comes to an end, investors will struggle to assess forecasts for businesses that have benefited from the pandemic, from home office supplies to disinfecting wipes. There is also uncertainty about business travel and the use of video conferencing in the future.
  • Pricing power will be important for companies to maintain profitability as the risk of inflation picks up. Companies that see margins squeezed as raw materials, freight and wages rise, will be better able to pass on those costs to customers.
  • Europe has been increasingly flexible during crises. The EU’s willingness to suspend debt and deficit reduction targets for member states is sensible in the current environment and will help reduce panic in future crises.
  • Mario Draghi’s appointment as Italian prime minister is welcome for both Italy and the EU. With politics in Europe changing, Draghi’s leadership position in Europe should help stabilize its crucial relationship with the US, which has degraded over recent years.
  • ESG is becoming a central issue for European consumer goods companies. It matters to consumers at an accelerated pace. Down the road, governments may penalize companies that do not improve performance on packaging, carbon emissions or water use. When looking for long-term investments, it is important to seek out companies that are investing to be sustainable and meet the demands of their customers and governments.

 

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