Europe – the tide is turning

investment viewpoints

Europe – the tide is turning

Didier Rabattu - Head of Equity

Didier Rabattu

Head of Equity
Pascal Menges - Head of Equity Investment Process and Research, Client Portfolio Manager

Pascal Menges

Head of Equity Investment Process and Research, Client Portfolio Manager

We believe the conditions are now right to drive investors back to Europe after a lost decade.

The actions taken by authorities in response to the pandemic are setting the stage for a new period of European economic strength and stability. In addition to strengthening the economic health of the Eurozone, these plans would create a wealth of investment opportunities. It is our view that there are now five key arguments in favour of Europe.

Firstly, there are the unprecedented fiscal and monetary measures that have been enacted. The European Central Bank (ECB) has now introduced a series of extraordinary measures designed to support the liquidity and financial health of the Eurozone economy, such as the Pandemic Emergency Purchase Programme (PEPP). This is hardly the first time the ECB has intervened in markets but these latest proposals are unprecedented both in terms of speed and scale.

There is also the fact that the European Commission remains engaged in a long-term sustainability drive with a stated aim to ultimately make the European Union carbon neutral by 2050, leading to an ambitious investment plan that could ultimately reach EUR 7 trillion by 2050. The European Green Deal Investment Plan, which is the investment pillar of the ambitious Green Deal industrial strategy, and is intended to mobilise at least EUR1 trillion in sustainable investments over the next seven to 10 years.

Thirdly, France and Germany recently announced plans to join forces in order to propose a COVID-19 economic recovery fund, with a funding mechanism which paves the way for potential increased fiscal integration and would enhance the credibility of Europe as monetary bloc. Transfers will be based on need, rather than contributions, to the EU budget and in forms of grants rather than loans which put forward clearly the concept of “solidarity.”

We can also see evidence of the banking sector being freed up to form part of the solution to the crisis. European banks are being “un-constrained” as they are being freed to use their capital buffers and they will benefit from lower funding costs.

Finally, it is now clear that Europe has been more effective in combatting the pandemic than other countries. This discrepancy will likely be reflected in the strength of the economic re-start. These dynamics creates much more volatile economic conditions in the US, for example, when compared to Europe where the upturn in the economic cycle could therefore be more pronounced.

This is very relevant from a market perspective. European equities are the most exposed to a cyclical recovery. We estimate that 30% of the European Equities are in sectors the most exposed to a cyclical recovery. This exposure is even greater when looking at the smaller companies (MSCI Europe ex-UK Small index) with close to 37%. In addition these sectors are also important beneficiaries of the EU recovery measures.

Global investors require still a much higher risk premium to invest in European large cap and European small cap than for the US counterparts. These higher risk premiums have not aligned with the US since the European sovereign crisis. This is particularly true for European small cap.

 

Read the full paper here

important information.

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document  nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.