Should European equity investors follow Macron’s lead?

“I never tire of reminding people that over half of the profits and revenues of European companies now come from outside of Europe.”

Those are the words of Niall Gallagher, manager of GAM Star Continental European Equity fund – and words he has reiterated for a number of years now.

But today, more than ever, this trait of European companies seems particularly pertinent. The ongoing war in Ukraine, fiery protests in France and the threat of recession in the Eurozone, are all weighing on sentiment, so it is perhaps little wonder that amidst all the doom and gloom, hopes are being pinned on opportunities elsewhere.

Making the most of China’s recovery

Europe’s political leaders are certainly casting their net wider than the continent, and Asia is an obvious place to start.

China is the world’s second largest economy, and, following its reopening from Covid lockdowns, it is experiencing a rapid recovery and contributing to a more upbeat global economic momentum – all good news for European companies.

French President Emmanuel Macron travelled to the country earlier this month. in an attempt to strengthen economic relations with the superpower. More than 50 French business leaders travelled with him and signed a long list of deals to supply China with French products. It is this Macron angle that many European equity fund managers are focused on.

“China reopening after Covid lockdowns has been a big theme for European companies,” said Mark Nichols, co-manager of the Jupiter European fund. “The CEOs of two European beverages companies have recently told us that Chinese consumers are returning rapidly. Overall, China is a significant market for European companies, and those companies we speak to are optimistic that this current resumption of consumption will turn into a healthy, normal demand environment for the Chinese consumer.”

“European equities give superior exposure to Chinese economic recovery,” agreed Zehrid Osmani, portfolio manager of the FTF Martin Currie European Unconstrained fund. “Europe is more exposed to the Chinese economic cycle in particular, therefore a rapid recovery in Chinese economic activity could be more supportive for European economic momentum.” This, he says, is particularly true for luxury goods sales, to which his fund has exposure.

Cheap valuations

China’s reopening is not the only opportunity for European equities though. They also benefit from being cheap.

Tom O’Hara, co-manager of the Janus Henderson European Selected Opportunities fund, says European equities are currently “cheap even for Europe”.

The weaker euro also makes the regions products more competitive in his view.

Niall Gallagher agrees. “Valuations are attractive in absolute terms and very attractive relative to the US,” he said. “Even with the strong outperformance of Europe since the second half of 2022, European equities remain at a deep discount of around 30% to the US.”

“Company valuations have been reset due to higher interest rates and, over the long-term, share prices tend to follow earnings,” added Benjamin Moore, manager of the CT European Select fund. “As a result, good companies can continue to grow, and their lower valuations have created opportunities in the current climate.

While European equities have struggled to keep up with other markets over the past decade, they saw a reversal of fortunes in 2022. China’s reopening is spurring demand for the continent’s goods, and this, coupled with cheap company valuations and a number of longer-term structural tailwinds, means that European equities have more going for them now than in a good, long while.