EXPERT INSIGHTS FROM BLACKROCK FUNDAMENTAL EQUITIES

Three reasons to consider European stocks

20-Jul-2022
  • Andreas Zoellinger
  • Brian Hall
  • Nigel Bolton

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. The views expressed do not constitute investment or any other advice and are subject to change.

Seeking short-term stability, long-term opportunity. Europe faces a period of economic weakness as an energy crisis – sparked by the invasion of Ukraine and sanctions on Russia – burdens households and businesses with higher fuel costs. This exacerbates an inflationary scenario brought about when post-pandemic demand bumped into disrupted supply chains. Now the European Central Bank aims to temper demand and bring down inflation by raising borrowing costs – adding further to slowdown fears. Yet we believe it’s possible to be positive on European equities without being positive on the region’s near-term economic prospects. We see three reasons to consider sticking with European stocks:

  • Below-average valuations suggest economic pessimism is in the price
  • Quality, income-paying stocks can offer stability as growth slows
  • Many European companies are key in the drive to net zero, in our view

For more expert insight, please visit the BlackRock Fundamental Equities homepage.

1. Valuation

Near-term economic gloom is already reflected in stock prices, in our view – and in the valuation gap between European and U.S. stocks. Europe’s reliance on Russian energy supply puts the region in a vulnerable position as war rages on. But European equity valuations are now below their long-term average, as the chart below shows, whereas U.S. stocks appear far more expensive on a historical basis.

We believe European stocks now represent good value for investors seeking to capitalise on recent market volatility to gain exposure to long-term structural trends – such as the shift to a net-zero future.

Equity market valuations for the U.S. and Europe

2. Short-term stability

Europe is home to many companies with the characteristics we see as critical to riding out periods of inflation and slower economic growth. We believe it is important to invest in quality companies that are highly profitable, have strong market share and consistently grow their earnings, cash flow and dividends – regardless of economic conditions.

The importance of income. We place an emphasis on dividends as a key source of return in the absence of strong share price gains – and more than 70% of European companies said they would reinstate or increase dividends following unprecedented cuts during the COVID crisis1.

We look for mature, cash generative companies that have proven their business models over time and are supported by strong balance sheets and reliable end markets. These companies can be found across sectors, although company selection is key. We particularly favour the European healthcare sector in this environment.

Healthcare. Healthcare companies have historically been thought of as “defensive” stocks, where performance isn’t tied to economic conditions because medical care is viewed as a necessity. Some of the world’s leading healthcare companies are found in Europe. We look for companies that invest in innovation to grow market share; have long order backlogs and expertise that isn’t easily replicated; have a strong history of sales growth during previous economic downturns; and appear set to benefit from post-COVID trends such as laboratory automation, an increased focus on consumer healthcare and demand for innovative vaccines.

3. Long-term opportunities

Europe is home to many “best-in-class” companies that we believe are well positioned to help global governments meet their net-zero emissions targets. The European Union (EU) aims for greenhouse gas emissions to be 55% lower than 1990 levels by 2030, and to reach net-zero emissions by 2050. The war in Ukraine has injected greater urgency into this policy.

Energy innovation. We seek to invest in companies that provide innovative solutions to the energy crisis and the drive to a net-zero future, such as the production of “green” hydrogen – hydrogen production powered by renewable electricity – that can replace fossil fuels in industrial manufacturing and also be used to power trucks. We also like the makers of semiconductor manufacturing equipment essential to the shift to electric vehicles.

Energy efficiency. Buildings account for 40% of Europe’s energy consumption, and much of the money from the EU’s €1 trillion “green deal” may be allocated to this area. So we look for companies that can reduce the energy bill – insulation and window companies, as well as heat pump manufacturers, to name a few.

Renewed need for renewables. The EU hopes to triple solar and wind energy by 2030, saving 170 billion cubic meters of gas use. Direct providers of wind and solar energy are clear beneficiaries. But the supply of raw materials such as copper is also essential to this process – and to electrification and digitalization in general.

Read the full report for more

1Barclays Research, Equity Strategy, March 2022