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Amber Sinha, senior portfolio manager of global equities at CIBC Asset Management.
So it is true that European equities have been leading the performance in the last few months. I would actually go back to the fall of last year, fall of 2020 and since then we’ve had a fairly uninterrupted run up in equities and European markets have done fairly well. Why? I would say for one, Europe tends to be a more cyclical market anyways, that’s just because of how it’s structured, so the large representation of financials, industrials, 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.
But again, on the flip side, when the markets start going up, like we’ve seen in the last few months, European equities definitely participate visibly in that type of environment. I will also say that the market is looking for a post-pandemic world, and in that sense as well, European equities or the European countries in fairly good order now. Through this pandemic, it’s been like a pendulum swinging between North America, Europe and Asia in terms of who’s best positioned. A few months back, it looked like it was the U.S. and they seemed to have hit a wall with vaccination rates for this moment.
So in that context, Europe looks pretty good. They seem to be opening up their economy, lock downs seem to be a thing of the past and the market wants to make a comeback, so I think that’s helping European equities as well. And more recently, I would say […]. You know, we’ve had a little bit of heightened volatility in Asia, specifically in China and that’s probably led to some fund managers being more comfortable allocating money to European equities. So I think you put that together it, for the most part, explains the strength in European equities that we’ve seen recently.
We do have a flexible stance towards European equities and within European equities towards the highest quality franchises. There’s not a lot of high quality franchises in Europe that are still undiscovered or misunderstood, so attractive valuations are more difficult to find, but that’s what we are doing all day. So I would say generally European equities should participate as we continue to recover from the pandemic. If that is going to take us a little longer, then I would just have that as one caution for European equities.
When we drill down into what pockets of the European markets seem more attractive to us, I would say travel, for one. Again, given the Delta variant news from across the world, travel plans, back to office plans have been postponed in most parts of the world, including Europe. In that situation, it’s offered us pretty attractive valuations on travel-related companies, these would be stocks like WHSmith, for example, which is a travel retailer, or Vinci, which is a large airport operator in Europe. I think at the end of the day, we do get past the pandemic and we will all again get on a train and on a plane at some point, so you know, if that were to occur, I think some travel franchises in Europe look exceptionally attractive to us.
Industrials, again, we’ve seen a little bit of a weakness in the economy, again, the Delta variant created. Some industrial stocks have pulled back from Europe, I would say, it presents with some of the strongest industrial franchises globally and I’m sure there are some that are most respected than the others and I think those are the areas where we should be spending some of our time. I’d also mention technology. Now, technology has not really been a big sector in Europe. In the last 10 or even 20 years, the U.S. has been where all the technology action is.
We’ve seen some changes, at least small, that Europe seems to be working toward a competitive technology economy as well, so we’re looking for more technology within our European portfolio. We remain fairly well represented, but given that it’s a dynamic sector in Europe now more than it has ever been, I’m sure there’s some good opportunities on that side as well.