The more things change the more they stay the same – that seems to be the mantra for European equities nowadays. 
The first four months of 2021 have been dominated by negative headlines, as elevated numbers of Covid cases, new economic lockdowns and the slow pace of vaccinations have seen Europe heavily lag the US and UK when it comes to any potential recovery.
Much of the Covid battle has been fought - to Europe’s detriment – at a national level and ‘vaccine nationalism’, as I saw it termed recently, has done the EU no favours. There are also numerous political considerations from domestic elections, ongoing Brexit issues and the threat of rising inflation.
Add it all together and you get quite a potent mix, so I was surprised to see Europe has actually been one of the better performing markets year-to-date, returning almost 8 per cent, ahead of the likes of Japan, Asia and emerging markets.
The economic uplift in Europe in the past few months has been supported by sectors that fared poorly in the last calendar year, such as energy and financials, while defensive areas that are less tied into the economic recovery, such as utilities and real estate have underperformed.
Let’s be clear that it is only four months, and any potential recovery will lag other parts of the world – nevertheless there will be opportunities.
For example, the domination of growth stocks in Europe has been as stark as it has been in other parts of the world – and in some cases more so. I recently read a research document from Lazard Asset Management which points to the dispersion in valuations between the stocks with the highest and lowest valuations being at its widest since the tech bubble in 2000. That disconnect between those highest valued stocks and the rest of the market could bring opportunities, particularly if the shift to value investing continues.
You cannot discuss Europe without mentioning politics. In addition to the vaccine rollout, there is also some early testing of the Brexit agreement taking place, for example Ireland is taking more of a relaxed route compared to the stringent interpretations of European officials in Brussels.
We should also remember not everything has been agreed. Europe has negotiated what is important to them at this stage – less so the UK. But there are positives, Italy now has a new prime minister in ex-ECB president Mario Draghi, giving its government far more creditability – while Germany and France both go to the polls in the next 12 months.
I recently listened to a podcast from Morgan Stanley head of European and UK equity strategy Graham Secker, who says that while we have seen an ongoing shift from an early-cycle to a mid-cycle economy for the likes of the US, the challenges previously mentioned have delayed this in Europe – and it is this which could see the region outperform its global peers going forwards.
The reasons for this are fourfold.
Firstly, the economic data across Europe has come in considerably better than expected. For example, the IHS Markit Eurozone Manufacturing PMI increased to a fresh record high of 63.3 in April of 2021 from 62.5 in March (anything higher than 50 implies growth). Output grew for a tenth straight month, expanding at a rate unsurpassed in over two decades of survey history.
Secondly, European earnings are also heavily tied to global earnings, with Secker pointing to European earnings rebounding by 50 per cent or so through this year and next, which should equate to a bigger bounce back than seen in other regions.
Europe has also been perennially unloved – which has resulted in it looking cheap compared to other parts of the globe. Flows have been excessive in other regions – for example there have been £6.2bn of net inflows into the IA Global sector in the past six months, by contrast, Europe has seen almost £200m of outflows in that time.
The final reason is the impending approval of the European Recovery fund. This is expected to result in significant fiscal expansion with the monies also boosting economic growth in the next few years.
So there are reasons for optimism. A broad economic recovery would benefit Europe and its plethora of cyclical companies. Any recovery is going to be on a country-by-country basis, but it is underpinned by a fiscal drive, while the focus on ESG issues will also garner consumer support. Europe is going to be late to the recovery fight, but it could end up being the place to be when some of its peers start running out of steam.
There are so many challenges to navigate that I’d consider experienced stock pickers like Janus Henderson European Focus manager John Bennett or Marlborough European Multi-Cap manager David Walton. Other options, like BlackRock Continental European Income and LF Montanaro European Income, managed by Andreas Zoellinger and George Cooke respectively, might appeal for those eyeing dividend growth in this space.
Darius McDermott is managing director of FundCalibre. The views expressed above are his own and should not be taken as investment advice.