Portfolio Manager Donny Kranson discusses the stimulus package, normalization after COVID, and the impact of inflation.
European equities are performing strongly this year as they are seeing the end-of-COVID bounce that other regions had last year. The reflation trade has helped fuel a rebound in sectors such as financials and commodities.
The concentration of value stocks in the MSCI Europe benchmark, including financials, utilities, materials and energy, has declined while the number of high quality growth companies in technology, health care and consumer goods has increased. Europe should post faster earnings growth than the US over the next few years.
The financial crisis revealed holes in Europe’s political system, which led to austerity and low growth, and contributed to Brexit and the rise of populism. However, there has been a realization that a more cohesive Europe should improve the economic landscape.
The €750 billion NextGenerationEU stimulus package should fund projects worth roughly 12% of GDP. This is the first time Europe has implemented an EU-wide debt-funded recovery program. It should lead to decent growth and help ensure less extreme crises in the future.
While full normalization appears only to be a matter of time, companies in travel and beverages are facing easy comparables from the second quarter of last year and should quickly surpass those numbers. Beverage consumption at home does not seem to be declining in places where restaurants and bars are reopening. There could be a lasting positive consumption effect from the pandemic, as well as a boost from events including the Euro soccer championship and the Olympics.
Higher inflation could be positive for Europe as the longer-term worry has been very low inflation or even deflation. It can help companies with strong brands and pricing power to lift prices in line or above inflation. For example, a Ferrari buyer will not be greatly affected if inflation causes the price to rise 1-2%. Companies without pricing power will find inflation more of a headwind.
Brexit continues to cause disagreement between the UK and the EU. That disagreement is unlikely to spiral out of control and threaten businesses and investments. However, it is an issue to watch.
Europe and the US are attempting to forge closer ties, while the EU has put ratification of its trade deal with China on hold. On the one hand, closer cooperation with the US can remove the threat of tariffs on industries like aviation. However, European investors must be mindful that China is a large market for goods such as European autos.
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