Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The togetherness of Euro 2020 promises to mark the beginning of a very different summer than the one that went before. Football stadia and pub gardens are set to become busy places once more, as fans settle into a month of sports action played out in eleven of Europe’s great cities.
The tournament promises to deliver a much needed boost to the operators of social spaces, as well as attractive opportunities for European brands to buy some extra airtime. It comes at a good time for Europe’s economy which, according to the OECD’s latest forecasts, will bounce back from the pandemic less strongly than the US and the UK this year. Economic growth in the eurozone is expected to be around 4.3% in 2021, compared with 6.9% in the US1.
Company earnings, on the other hand, are anticipated to grow quite a lot faster in Europe. Latest estimates suggest they may rise by as much as 45% this year, easily bettering earnings growth of around 34% in the US2. Surprisingly, perhaps, European stocks currently trade at a discount of about 18% to their US peers, based on the amounts companies in both regions are expected to earn over the next 12 months3. Faster growth without a premium price continues to underpin the case for European stock markets, even after recent good gains.
Investors focused on sustainability will also find a lot to like in Europe. According to Yale University, all of the world’s top-10 countries ranked by environmental performance are European, with Denmark topping the list. You have to go down to Japan in twelfth place to leave the continent4.
The EU’s ambitious “Green Deal” aims to decouple economic growth from the use of resources; pledges inclusivity at its heart; and contains a binding commitment to achieve climate neutrality by 2050. An associated “taxonomy” regulation has been developed in order to define and encourage investments in sustainable projects and activities.
Europe’s diverse climate and topographical features will help it achieve these aims. By combining the power from hydroelectric plants in Norway, solar PV farms in Iberia and wind farms in Denmark, for example, Europe already has a sizeable, reliable supply of sustainable energy it can use throughout the year.
So what’s the catch? Well, historically, European equities have often traded at some kind of discount to the US, even if that discount hasn’t been as large as it is today. There have been a number of reasons for this with, perhaps, a deeper savings and investment culture stateside chief among these.
The US continues to occupy a lion’s share of benchmark world stock indices, so international investors with limited amounts of capital to spare may have tended to allocate their funds to US companies before any other. Tech giants like Apple and Amazon command obvious premia for their global recognition and well-understood abilities to deliver very strong growth over time.
Banks are another point of difference. A profitability gap has opened up between US and European banks, after several years of superior growth, a period of higher interest rates between 2016 and 2019 and amid higher levels of mergers and acquisitions activity in the US.
Then there’s Europe’s hitherto patchy rollout of Covid-19 vaccines which, according to the OECD, could have deferred a full economic rebound to pre-pandemic levels by up to a year compared to some other regions. After a difficult start, however, the pace of vaccinations has been picking up, with 48% of adults across 30 countries now having received at least one dose of a vaccine5.
That’s critical for Europe and the world generally, because a large part of the economic fight back this year is expected to be consumer-led. That should prove a boon for Europe, which remains home to a large number of famous brand names.
With China overtaking the US as Europe’s largest trading partner last year and growth in both countries set to rise sharply in 2021, the likes of Daimler and Ferrari along with luxury goods manufacturers including LVMH and Hermes could be looking out to a much better year ahead6.
Away from the direct consumption themes, Europe has a strong foothold in the green industrial revolution, via companies such as Vestas Wind Systems of Denmark or Norway’s recycling machines maker Tomra. Specialised chemicals (BASF, AkzoNobel) pharmaceuticals (Roche, Sanofi and Novo Nordisk) and advanced engineering (Siemens and Bosch) are among Europe’s other high points.
In addition, what Europe may lack in the form of the e-commerce and social media giants that America has, it can make up for with less well-known companies also at the forefront of technological change. The Dutch company ASML, for example, is the world’s largest supplier of photolithography systems machines used in the production of semiconductor chips.
Investing in a European fund can bring a good deal of additional diversification to your portfolio, through sectors not well represented in the UK and across a diverse group of nations, each with its own particular strengths and weaknesses . As Greece showed in 2019 and Denmark a year later, the stock markets of individual European countries still have the potential to deliver truly impressive returns, when the time is right7.
Fidelity’s Select 50 list contains five actively managed funds investing in Europe, including the BlackRock Continental European Fund and JOHCM European Select Values Fund. You can read more about them all here.
1 OECD, 31.05.21
2 FactSet, 04.06.21, and Yardeni Research/I/B/E/S data by Refinitiv, 27.05.21
3 MSCI, 31.05.21
4 Yale Center for Environmental Law & Policy, Environmental Performance Index 2020
5 ECDC, 10.06.21
6 European Commission, 02.06.21
7 Bloomberg, 10.06.21
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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