2021 International Equity Outlook: Finding quality in a momentum-driven market

Portfolio manager David Souccar discusses where elevated speculation in parts of the market presents risks for investors, and opportunities for growth in both domestic and global European companies.

• Momentum characterized international equity returns in 2020, fueled by low interest rates and excess liquidity. However, elevated speculation in parts of the market presents risks to investors. These risks include a surge in SPAC (Special Purpose Acquisition Company) issuance and a raft of new listings for companies that are not yet profitable. In addition, large flows of capital into private equity are creating competition for public companies seeking attractive acquisitions. Lastly, excess capital in so-called “green” initiatives has pushed valuations ahead of fundamentals in the ESG space. While these pockets of momentum are concerning, many companies have performed well due to solid fundamentals.

• Leading IT companies in Europe are finding new ways to analyze and process data. For example, US consumers increasingly rely on companies like UK-based Experian, the largest credit bureau. Other names include Netherlands-based Waters Corp, an analytical laboratory instrument and software company, and Carfax, a large used cars database that is owned by UK-based IHS Markit.

• We continue to believe there are opportunities in European companies, despite COVID restrictions, the impending impact of Brexit, and sluggish economic growth. Domestic companies have the capacity to grow faster than anemic local economies particularly if they operate in growing industries or have a disruptive product or service. For example, Cellnex, the largest independent tower company in Europe, is a leader in the fast-growing mobile broadband segment and is also a market consolidator. Additionally, Europe is home to many global businesses, such as luxury companies LVMH and Ferrari, online payment platform Adyen, and consumer staples stalwarts Unilever and Nestle.

• Japanese equities have generated lackluster returns over the past few decades, but have produced solid performance this past year. While there have been broad improvements in corporate productivity, Japanese companies continue to trail their US and European peers. However, some companies are pulling ahead in corporate governance, such as Olympus and brewer Asahi. We believe active managers can now find quality opportunities in Japan. 

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