Europe: From Great Challenges Come Great Investment Opportunities

Lately, it has seemed easy to find reasons to avoid investing in European assets:

  • There have been many important dates in the Brexit process. The dates seem to come and go, and no one has any clarity on exactly what will happen.
  • Last year, a populist government was formed in Italy—a country that has issued so much debt that actually paying it back seems dubious.
  • Various political events—whether elections in Germany or riots in France—have showcased an undercurrent of tension and potential for future instability.

While this list isn’t exhaustive, it hints at factors that affect investors when they initially think about Europe.

Context Point One: Performance

Before my hands hit the keyboard, I know U.S. equities have outperformed European and most global equities for a significant period of time.

However, within European equities, we have seen a divergence between European exporters and the broader market. If investors succumb to thinking about these and other risks, it may lead to less demand for the euro against other currencies, encouraging depreciation. That could encourage further outperformance of these exporters.

For example:

  • European equities have started 2019 with outperformance over U.S. equities.
  • 2018 was a rough period for risky assets globally, but European exporters outperformed the broad market by more than 1.0%.
  • Since the launch of our Europe Hedged Equity strategy in July 2012, we’d bet that many investors wouldn’t realize how close the performance of European exporters was to U.S. equities.

Figure 1: European Exporters Have Outperformed over the Longer Term

European Exporters Have Outperformed over the Longer Term

Context Point Two: Valuation

Looking at performance alone (and forgetting about things like the U.S. government shutdown), it’s easy to make the case to invest in U.S. equities and harder to make a case to invest in European equities. Of course, this would tend to mean that European equities would be trading at far less expensive valuations than U.S. equities.

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