European Equity: Combining value and quality in this new market phase

We believe we have entered a mature stage of the financial cycle amid central bank monetary policy normalisation (more advanced in the US) and decelerating economic growth globally. Protectionist dynamics are also features of this phase of the cycle, while the US fiscal expansion and a capex revival are all forces working to extend it.

The move to a late stage of the cycle is leading to a tightening in liquidity and financial conditions and to potentially more frequent episodes of volatility spikes, such as the one experienced in February. Market swings in 2018 have been the result of this new, less complacent and less directional market, which we expect will continue.

In 2018, investors have so far been more cautious on European equities. In fact, while valuations remain relatively compelling, multiple political risks weigh on the appetite for this asset class. In the short term, a series of events will continue to create noise on European assets: country-specific political deadlines, the continuation of trade disputes at least until the US mid-term elections in November, the starting of the campaign for the 2019 European parliament elections and the Brexit negotiations.

With the uncertainty led by this newsflow, we believe that European equities are starting to offer pockets of opportunities, especially for stock picking investors. We think that 2019 could mark a comeback to this asset class as global investors reassess the equity opportunities in the markets, with a stronger focus on the quality of companies, diversification of their portfolios and avoiding crowded and overvalued areas. When this occurs, we think that a focus on quality companies that are able to deliver sustainable earnings growth in the future and that are trading at discount levels will be key to exploring market opportunities in Europe.

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