European Equities: A Contrarian Case Amid Stagflation Fears
As markets grapple with concerns over stagflation, it is tempting to view Europe as a region weighed down by sluggish growth and persistent inflation. The bearish case for the US, as outlined recently, draws parallels to the 1970s, where supply shocks and policy missteps led to economic stagnation. Yet, when it comes to Europe, the narrative may not be as dire as it seems. A closer look reveals underappreciated resilience and opportunities that contrarian investors may find compelling.
While inflationary pressures remain a global concern, Europe has made significant progress in taming price increases. Eurozone inflation has cooled to 2.4%, allowing the ECB to cut rates by 50 basis points in late 2024, with further easing signalled. Real wage growth has turned positive, supporting consumer spending and stabilising corporate earnings. This is not the runaway stagflation of the 1970s but rather a controlled descent toward normalisation.
Moreover, Europe’s green transition is proving to be more than a policy ambition as it is becoming an economic engine. The €1.2 trillion Green Deal is driving tangible growth, with renewable energy now powering nearly half of EU electricity. Companies like Siemens Energy and ASML are capitalising on this shift, with robust order books and strong revenue forecasts. Goldman Sachs estimates that decarbonisation capex could contribute 0.7% annually to Eurozone GDP through 2030 which is a structural tailwind that many investors continue to underprice.
Valuations also continue to present a compelling case for European equities. The MSCI Europe trades with just 13x forward earnings at a steep discount compared to the S&P 500’s 22x multiple, while in the meantime offering dividend yields more than double those in the US. Even cyclical sectors show promise: BMW’s electric vehicle margins now rival Tesla’s, and LVMH continues to defy luxury slowdown fears with steady organic growth.
Critics often point to geopolitical risks, but Europe has made remarkable strides in reducing its dependence on Russian gas, which now accounts for just 15% of imports compared to 50% in 2020. While a peace treaty between Russia and Ukraine remains uncertain, any progress towards resolution could provide a significant boost to European markets, potentially stabilising energy prices and improving investor sentiment.
For active managers, this environment offers fertile ground for selective stock-picking. Mispricing abounds in mid-caps and green infrastructure plays, while sectors with pricing power, such as healthcare and industrials, are well-positioned to navigate market volatility.
Europe may not be on the brink of a renaissance just yet, but the case for its equities is far from the bleak picture painted by bears. As the fog of uncertainty begins to clear, the contours of recovery could become visible. For investors willing to look beyond the headlines, Europe may offer opportunities that are potentially too significant to ignore.
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