The economic outlook in Europe is challenging, yet the corporate outlook has some reasons for optimism. After all, it is always darkest before dawn, isn’t it…?

Investing in Europe looks a pretty scary proposition as things stand. A war on the doorstep, a fundamentally flawed energy infrastructure, record inflation, a stretched consumer and rising interest rates. Luckily for us investing in European equities is not the same as investing in Europe.

The myopia of markets has always been a little akin to the proverbial dog chasing its tail. As Covid hit in 2020, market participants worried about the effects of this on consumer behaviour. As Covid receded in 2021, market participants fretted over disrupted supply chains. As 2022 unfolded, market participants wilted in front of record inflation and a cost-of-living crisis. No doubt this outlook will fail to identify the source of investor pre-occupation that ends up defining returns in 2023, but we do know a few things.
1 Covid disruptions and restrictions around the world are far fewer and far less constraining than in preceding periods. China may be the exception to this, but even there is some evidence of rising mobility, including reduced quarantine periods.
2 Corporate commentaries increasingly suggest that disruptions to supply chains across industries are easing and, correspondingly, freight and shipping rates are declining.
3 Inflation and interest rates have historically moved in cycles. New paradigms are very few and extremely far between. Rising rates inevitably give way to falling interest rates, just as day follows night. At certain times different investment styles have led markets higher and the death of ‘growth’ investing (choosing companies that grow faster than the market average) is no truer than the death of ‘value’ investing (choosing companies that appear to be underpriced) that was envisioned in recent years.
4 Valuation - Across the world, stock prices have collapsed, and in Europe it has been more dramatic than in some other regions. European stocks are trading at a significant valuation discount to the US – around 50 percent cheaper on a price-to-earnings basis (a measure of value calculated by dividing a company’s share price by its earnings per share). This discount of European stocks versus the US is the widest in over five years and, in our view, it is extreme.
5 Some sources of growth are truly structural, or reflecting large-scale change. For example, between 2010 and 2020 the amount of data that was created, consumed, and stored around the world grew approximately 3,000%. Future projections indicate that this expansion is unlikely to reverse or slow down any time soon.
6 Action to address climate change requires significant investment to make buildings more sustainable and energy efficient, including insulating them – it is estimated that buildings account for more than 40% of global carbon emissions. Regulation and government spending in Europe and the US already reflects the need to improve existing building stock and ensure better efficiency of new buildings. Therefore, companies that can create products and services to help improve efficiency of buildings should be well placed to benefit.
7 In 2016, more than 1.9 billion adults 18 years and older were overweight. Of these over 650 million were obese. Sadly, these figures are continuing to increase as there is greater emergence of wealth around the world. This is feeding into increasing health issues, such as the fastest growing chronic disease -- diabetes – and a greater burden on global health resources. There is a clear need for companies that can help to counteract this trend.

The consensus view is bleak for the European economy – but we think the outlook for companies and the European equity market is more positive. If the market shifts its view from macroeconomic doom and gloom to focusing on how individual companies are doing – we think that quality companies with exposure to long-term growth trends should outperform. These are the types of companies we want to be exposed to for long term returns.

Outlook 2023: Secular trends create challenges and opportunities

The value of active minds: independent thinking

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