Where to invest in Europe for a coronavirus recovery
European stocks more broadly might not have enjoyed quite as buoyant a comeback as U.S. markets, but investors say there are unique characteristics which make a compelling investment case for the region in the recovery from the coronavirus crisis.
The pan-European Stoxx 600 index has risen nearly 32% since the depths of the market turmoil in mid-March, but is still down around 12% year-to-date. By comparison, the S&P 500 is up 42% since mid-March and is now down just over 2% year-to-date.
Nevertheless, Tom Stevenson, investment director for Fidelity Personal Investing, said that in the past few months investors have warmed to Europe as the region "appears to have successfully navigated the Covid-19 crisis with a combination of well-enforced lockdowns and massive government and central bank support."
Germany and Central Europe are positioned to recover faster than the rest of Western Europe, said Athanasia Kokkinogeni, senior analyst for Western Europe at market intelligence and consulting firm DuckerFrontier. This is due to these markets having lower exposure to tourism and a greater reliance on manufacturing.
"Across Western Europe, information technology, food products, FMCG (fast-moving consumer goods), finance and insurance, and pharmaceuticals will present opportunities in 2020-2021, whereas mining, durables, transport equipment, construction, and hospitality will suffer disproportionately until the end of 2021," she said.
That being said, Kevin Thozet, a member of the investment committee at French asset manager Carmignac, said the firm had recently added exposure in its portfolios to Amadeus, a Spanish IT provider for the global tourism industry.
Amadeus' share price had performed strongly in recent years but then more than halved at the height of the coronavirus crisis, as travel restrictions brought tourism to a standstill.
Thozet said there were only a couple of other companies in the U.S. operating in the same space as Amadeus, so it was an example of the type of global leader business with a sector "monopoly" that Carmignac liked to invest in.
One obvious trend accelerated by the pandemic has been the wider adoption of technology in every day life.
The U.S. and Asia are typically investors' go-to markets for technology stocks but Europe also offers opportunities in this sector, according to Allianz Global Investors European Equities Portfolio Manager Marcus Morris-Eyton.
Technology accounts for the biggest sectoral exposure in Allianz GI's European funds.
Morris-Eyton said that many of the companies held in his funds had recently said that one area they are continuing and increasing investment into is technology and digitalization "to make their companies' digital infrastructure fit for the modern day world."
German software company SAP and French software business Dassault Systemes were a couple of examples that he highlighted as beneficiaries of this trend, both of which are held in the Allianz Continental Europe fund.
Martin Todd, co-portfolio manager at Federated Hermes, argued that the pandemic may have also accelerated the trend toward sustainable investing.
He suggested that an increasing consideration for environmental, social and governance factors in investment could be seen, for instance, with the focus on how companies have behaved in the pandemic, in terms of the treatment of their staff and customers.
Todd said that Irish building materials company Kingspan Group had recently been added as an investment in the Impact Opportunities fund he co-manages. The company's share price fell amid the recent volatility in markets.
Kingspan makes insulation for buildings, so it has a "very clear green story," in reducing a building's carbon footprint by lowering the cost of heating it.
It's an example of the type of company that stands to benefit from the EU Green Deal, the plan to make the trading bloc carbon neutral by 2050.
Todd explained that the European Commission, the executive arm of the EU, recognizes that better insulation can vastly reduce energy consumption and help meet carbon reduction targets.
"So whether through subsidies, tax breaks or stricter regulation on construction firms — companies like Kingspan are in a good position to benefit from the Green Deal," he said.
Why should you invest in Europe
Indeed, Stevenson argued that "nowhere is the choice of sustainable businesses better than in Europe."
Another reason to have exposure to European equities is the geographic diversity of revenues streams that companies in the region offer, he said.
Two-thirds of American companies' sales are made in the U.S. but just a third of European firms' turnover comes from the home market, he explained, adding that having this variety is "important in an uncertain world."
And although European stocks are not cheap following their rebound, Stevenson said that valuations were "reasonable," being in line with Japanese equities but "better value than those in the U.S."
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