European equities have seen a resurgence in recent months as investors shake off concerns about rising inflation and bet on the global economic recovery.
After a sluggish start due to lockdown measures and a slow vaccine rollout, economic data out of the Euro zone suggests its recovery is gathering steam. Amber Sinha, senior portfolio manager of global equities at CIBC Asset Management, says this momentum will continue.
“Europe tends to be a more cyclical market anyway just because of how it’s structured,” said Sinha, who manages the CIBC European Equity Fund and the CIBC Asia Pacific Fund. “The large representation of financials, industrials, and consumer stocks just make the European markets more cyclical, so when the market goes down, like it did last year, European equities provide large downside capture.”
On the flip side, when markets start to go up — like in the last few months, Sinha said — European equities do well.
Over the course of the pandemic, equities markets have moved like a pendulum, he said, swinging between North America, Europe and Asia in terms of which market is best positioned. A few months ago, the U.S. appeared to be in a favourable position after a strong vaccine rollout and booming recovery, but “they seem to have hit a wall with vaccination rates,” Sinha said.
Now Europe looks attractive.
“They seem to be opening up their economy, lockdowns seem to be a thing of the past and the market wants to make a comeback… So I think that’s helping European equities,” said Sinha in an Aug. 23 interview.
In addition, Sinha said heightened volatility in Asia, specifically in China, has likely led fund managers to allocate more money to European markets.
“I think you put that together [and] it, for the most part, explains the strength in European equities that we’ve seen recently,” said Sinha.
The Euro Stoxx 50 index is up about 18% this year, compared to a gain of around 20% for the S&P 500.
Looking forward, Sinha sees certain pockets of the European markets as more attractive, such as travel, technology and industrials.
Concerns about the Delta variant have postponed travel and back-to-office plans around the world, including Europe, Sinha said, but that’s also meant “pretty attractive valuations” on travel-related companies.
He looks to stocks like WHSmith, for example, a U.K.-based bookseller with outlets at airports, or Vinci SA, a Paris-based airport operator, as attractive opportunities. Eventually, Sinha said, we’ll get past the pandemic and people will be eager to get on planes and trains again.
“If that were to occur, I think some travel franchises in Europe look exceptionally attractive to us,” he said.
Industrials have also been impacted by the Delta variant, but with Europe housing some of the strongest industrial franchises, Sinha said, “those are the areas where we should be spending some of our time.”
He also sees potential in technology, which historically han’t been a big sector in Europe relative to the U.S.
“We’ve seen some changes, at least small, that Europe seems to be working toward the competitive technology economy as well,” he said, “so we’re looking for more technology within our European portfolio.”
However, Sinha cautions that there aren’t a lot of high-quality franchises in Europe that are still “undiscovered or misunderstood.”
“Attractive valuations are more difficult to find, but that’s what we are doing all day,” he said.
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