Closing the European Performance Gap

Although European equities performed well in 2019, there’s still a significant value and performance gap compared to US stocks, according to Franklin Mutual Series Portfolio Manager Katrina Dudley. Here, she gives reasons why she’s optimistic about the backdrop for European value stocks and discusses some potential market-moving events she’s monitoring.

Despite ongoing uncertainties and challenges, we think the positive performance European equities experienced in 2019 could continue in 2020. The events that drove 2019’s market rally—accommodative central bank monetary policy, a clearer Brexit path and progress on a US-China trade deal—continue to be sources of optimism, in our view.

This positive backdrop, combined with recent signs of stabilization in the global Purchasing Managers Index, suggests to us that near-term recession concerns that clouded the outlook at the beginning of 2019 are no longer a risk at the outset of this new decade. Also, following the recent transition of power at the European Central Bank (ECB), with Christine Lagarde taking the helm as president in November 2019 and having just announced a review of its inflation target, policy tools and communication, we believe the ECB could potentially encourage eurozone governments to boost fiscal stimulus to revive their economies in coming years.

European Investment Themes for the Next Decade

Looking ahead, we see a number of other reasons why investors might want to consider increasing their exposure to European stocks, including to gain exposure to companies with relatively stronger environmental, social and governance (ESG) credentials. Asset flows into ESG-related investments have been steadily rising, and Europe’s regulatory framework continues to support the evolution of ESG best practices and meaningful disclosures by European corporates, particularly as they relate to climate transition.

In addition, we think rising activism could be a tailwind for European equities, as active shareholder voices engage with management teams and boards. In our view, these conversations could lead companies to restructure their operations to improve performance. In some cases, we have seen companies act as their own activists, evaluating options to become more focused and streamlined by dividing businesses into separate entities.