European equities: The joke is on the herd
Toby Gibb says that with the attractions of smaller, domestically oriented European companies routinely going unnoticed, the sheep appear to have had the wool pulled over their eyes.
The Great Wall Street Joke Book was published in 1986. It was perhaps well timed, given that there was precious little humour to be mined from the Black Monday crash that hit markets the following year. Permit me to wow you with one of its gags.
A stockbroker's secretary answered his phone one morning: "I'm sorry," she said. "Mr Bradford is on another line."
"This is Mr Ingram's office," the caller said. "We'd like to know if he's bullish or bearish right now."
"He's talking to his wife," the secretary replied. "Right now, I'd say he's sheepish."
It is hardly a timeless rib-tickler, less still an advert for 21st-century gender equality.
If nothing else, though, it somehow taps into the present-day landscape of European equities – because sheepishness has long been a key characteristic of many investors' approach to this arena.
Broadly speaking, this tendency has revolved around viewing Europe in a particularly negative, unimaginative way. Unfortunately for the herd – or, if you prefer, the flock – such perceptions are now dramatically removed from the reality of the region's investment attractions.
The misframing of Europe
For decades now, it has been tempting to see Europe through a prism of low growth. Even the European Commission has consistently deployed euphemisms such as "gradual expansion", fuelling the knee-jerk inference that outperformance is more likely to be found elsewhere.
Many investors have thus effectively become apologists for the region. So have many investment professionals – some for their entire careers to date. They have simply clung to the idea of Europe as a place where numerous global businesses happen to be domiciled.
The changing composition of the MSCI Europe index over the past 15 years tells the tale. In 2010, there was a pretty even divide between companies with non-euro-denominated revenues and companies with euro-denominated revenues, but today the split is closer to 70/301.
This shift reflects a fondness for European-domiciled businesses that trade at a decent discount, just about merit a spot in sensibly diversified portfolios and – above all – explicitly entail no exposure to the domestic economy. For the herd, as far as Europe is concerned, that has been good enough.
Yet a second, more recent and more rapid shift has also taken place. Largely thanks to the far-reaching repercussions of President Donald Trump's return to the Oval Office, the appeal of Europe as a whole has suddenly become much more apparent.
As a result, more investors are gradually realising the framing they have relied on for so long is – and arguably always has been – misguided. They are grasping that Europe's domestic economy is precisely what they should be exposed to. But they are already behind the curve.
Signs of a genuine renaissance
We see several fast-emerging tailwinds for Europe. Most stem from how the region has responded to Trump’s stance on issues such as trade and defence.
First, fiscal policy in central Europe is being transformed. This is most obviously illustrated by Germany’s mould-breaking €500 billion spending plans, which were finalised in March – even by the fallout from Trump’s Liberation Day announcement on tariffs.
Defence budgets are set to rise significantly. The recent NATO summit concluded with a promise to hike related spending to 5% of GDP by 20352 – a move Trump hailed as “a big win for Europe and western civilisation”.
Consumption and income are also on the up. In January, the European Union (EU) reported rises in both the EU and the eurozone during Q3 2024, with especially notable climbs in countries such as Greece, Hungary and Spain3.
Meanwhile, in light of the US’s ongoing woes, the dollar may be entering a lengthy period of relative weakness. This clearly represents a boost for businesses with euro-denominated revenues.
Relatedly, the bizarre notion that long-term investment success can be derived from holding only a handful of US technology titans has been blown out of the water. Investors are once again casting their nets more widely – and Europe is their likely first port of call.
Positioned to seize unrecognised opportunities
All this could be unhappy news for those investors who have relentlessly applied the ‘low-growth Europe’ lens – not to mention those who have been underweight Europe in general. Many now find themselves less than ideally positioned.
By contrast, strategies such as the Artemis SmartGARP European Equity Fund have long maintained a suitably constructive view. The key for us has been to concentrate on earnings growth in domestically focused companies rather than international players.
Overall, even within the active management community, scant attention is paid to such businesses. This is mainly because most investment analysts prefer to ‘eyeball’ large-cap and mega-cap stocks, which are usually global entities.
The attractions of smaller, domestically oriented companies, therefore, routinely go unnoticed. In this regard, sadly, the sheep have had the wool well and truly pulled over their eyes.
Of course, one of the greatest joys of diligent stockpicking is to identify and invest in promising businesses before the herd – or, again, the flock – recognises their long-term potential. In Europe, as in any setting, it can be extremely rewarding to get in ‘on the ground’.
Many such opportunities still exist. But investors will be able to seize them only if they finally recognise that the landscape of European equities – rather like the alleged wit of Wall Street in 1986 – is no joke.