why should we continue to bet on Europe?

BDL Capital Management, founded in 2005, is an independent management company that invests primarily in European equities on behalf of institutions, private banks and CGPs. Olivier Mariscal, Head of Investor Relations, Marketing and Communications at BDL Capital Management, talks about what makes the Eurozone so strong from an investment perspective.

Inflation, central banks, economic recovery, the war in Ukraine… How is the stock market developing based on the news? How do you look at it?

Olivier Mariscal : The news often questions economists’ market scenarios. This is the case again in this year 2022, which started under the sign of sustained economic growth at a high level after a strong post-crisis catch-up in the 2021 crop amid inflationary tensions. US and European central banks appeared to have almost ideal conditions to begin the monetary normalization expected after years of keeping interest rates extremely low or even negative.

Since the middle of February, the return of geopolitical tensions, and then the outbreak of the Ukrainian conflict disturbed the situation. On an economic level, the shock has caused new strains on supply chains, adding to those associated with China’s so-called “zero-contagion” policy, which continues to prompt strict containment measures in some cities.

Due to the Russian-Ukrainian crisis, new sectors are experiencing shortages or at least supply difficulties. Naturally, agricultural raw materials such as corn and especially wheat are mentioned, of which Russia is the world’s leading exporter, and Ukraine is the third. But Russia also holds important positions in important industrial metals such as nickel or palladium, while Ukraine holds a dominant position in the production of several gases used in the semiconductor industry, such as krypton, xenon or neon (70% of world production of the latter).

This new tension exacerbates pre-existing inflation, which continues to spread to various sectors of the economy, even in those segments where one can talk about hyperinflation: trucking, energy, aluminum or some types of plastics. On a microeconomic level, this portends a more or less severe reduction in profitability for some companies this year, while the macroeconomic outlook itself is deteriorating.

How investment-friendly and a source of opportunity is Europe?

Olivier Mariscal : However, the economic scenario is not so bleak for investors. Opportunities remain, especially in European stocks. First, if the Russian-Ukrainian crisis is the source of inflation in the energy sector, then the weight of this zone in the world economy is very modest.

In Europe, we are also benefiting from companies resuming their investments after the forced pause due to the COVID crisis. They are also in the process of rebuilding their stocks, sometimes to levels higher than before the crisis, to protect themselves from further shocks.

As for growth in Europe through 2022, while we have deviated from the ambitious targets at the start of the year of around 4%, the European Commission continues to forecast growth of 2.7% per year, followed by growth of 2.3% in 2023. .

European stocks are also interesting when looking at their value. This is in line with the historical average, but above all the European market offers a significant discount, around 45%, compared to US stocks. We have never seen such a relative understatement in the last 50 years.

On the other hand, there are significant differences between sectors as well as between countries: for example, German or Austrian stocks are relatively undervalued compared to their historical averages, while Swiss and Portuguese stocks are quite high. All this requires a fundamental, sophisticated and selective approach to the European market. The importance of proper inventory selection (company by company selection) has never been more important.

What are your prospects for economic recovery?

Olivier Mariscal : The slogan for the coming months is FLEXIBILITY. Our discussions with companies confirm that inflation in Europe has not yet peaked as they continue to bypass price increases and that the second wave is coming with wages (German unions are demanding an 8% pay rise in the autumn).

Rising rates will continue to weigh on valuation multiples in the coming months (the Stoxx 600 average PE is trading at around 11.5x at the start of July, compared to 16x at the start of the year). In the 1970s, in conditions similar to what we know, the US market went from 20x PE to 8x in 5 years.

Therefore, it is critical to invest in companies whose absolute valuations are already low, so as not to have the double risk of earnings in the event of a recession and compression of multiples.

In partnership with BDL Capital Management