Chief Investment Strategist
In our recently published Quarterly Outlook we highlighted Europe as the region we like the most tactically in the second quarter. With the momentum in US and Japanese equities many are probably wondering why are bullish on European equities. Let us explain in more details why by going through three macro indicators.
While we like European equities tactically and one could talk about low P/E ratio and better sector diversification than US equities, European equities are not as attractive as US equities strategically. European companies have struggled for years to grow their revenue faster than inflation offsetting the attractive combination of 3.1% dividend yield and 1.6% buyback yield. Investors betting on European equities are betting that US exceptionalism cannot continue, not even in technology, and that the low equity valuations reflect so low expectations that Europe can only surprise. How to get exposure to European equities?
The two biggest ETFs on European equities are listed below for those that want broad-based exposure:
Last year, we wrote a primer on European equities highlighting its different features and where European equities are different from US equities. The five largest industries in the European equity market are health care, industrial goods & services, banks, food beverage & tobacco, and technology. One of the biggest changes from last year is that Nestle is no longer the largest constituent in the Stoxx 600 Index as it has been overtaken by Novo Nordisk as the market pushed the Danish pharmaceutical company higher amid a bonanza for its weight loss drug Wegovy. Another rising star has been SAP that was not part of the top 10 a year ago, but has risen to become the seventh largest stock in the main index.
Underneath the surface of the usual mega caps there is a group of highly profitable and high quality companies that any curious investor should consider. Below we have listed 10 companies with outstanding return on invested capital, the hallmark of operational quality, and outside the mega caps.
As we also highlight in our Quarterly Outlook, the European defence industry is going to be a high growth industry for years to come as the war in Ukraine has no end in sight, and Europe is determined to rely less on US defence in the future. Military budgets will continue to rise and most likely exceed current expectations. The list below highlights the stocks in our defence basket. Rheinmetall in particular is the most popular European defence stocks among our clients.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
