European equities still underappreciated

Oksana Patron

16 August 2023

Despite the impact of interest rate rises and the brakes applied by the European Central Bank (ECB), European equities might look relatively resilient versus other major developed markets, according to Lazard Asset Management.

Aaron Barnfather, the firm’s managing director and portfolio manager/analyst, has stressed that the short-term economic activity in Europe will feel the impact of interest rate hikes and there would be a material slowdown so European equity investors should therefore be braced for tougher times over the next few quarters.

But, at the same time, he said, there are reasons why Europe could be relatively resilient versus other major developed markets.

According to Lazard, the European earnings have surpassed expectations, partly due to a very different mix off businesses compared to the more tech-biased US market, greater weighting in financials of the European indices which benefitted from higher rates and heavily regulated banking sector.

On top of that, came the quality of European’s leading industrial names which continued to enjoy the healthy order books post-pandemic, and better than anticipated European consumer demand even though it was still affected by higher energy and food prices.

“Second, despite the relative outperformance of European indices versus US indices over the past year —which narrowed over Q2 2023)—and the robust earnings posted by European firms, the longstanding valuation discount to US markets has not budged.

“Global investors continue to look at the European market with either indifference or mild reticence, with flows into European equities being negative so far this year. European equities still appear to be underappreciated.

“European equities still appear to be underappreciated.”

Barnfather also pointed to the breadth of Europe’s market strength which compared favourably to the narrow leadership of the US market.

“The equal-weight version of the MSCI USA Index underperformed the market cap-weighted index by over 8% over H1 2023, as most of the US market’s gains came from a select group of predominantly mega-cap technology companies,” he added.

“Significantly more European names than US names have outperformed a relevant index, suggesting the European market currently enjoys sturdier foundations.”