why should we keep betting on Europe?

Founded in 2005, BDL Capital Management 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 in terms of investment.

Inflation, central banks, economic recovery, war in Ukraineā€¦ How is the stock market developing against the backdrop of the news? How do you look at it?

Olivier Mariscal : News often calls into question market scenarios of economists. This is the case again this 2022, which began under the sign of continued high-level economic growth after a strong post-crisis 2021 harvest amid inflationary tensions. US and European central banks seemed to have a near-perfect playing field to initiate the normalization of monetary policy expected after years of keeping interest rates extremely low or even negative.

Since mid-February, the situation has been disturbed by the return of geopolitical tensions, and then the outbreak of the Ukrainian conflict. On an economic level, the shock has created new tensions in supply chains, increasing tensions around China’s so-called “zero Covid” policy, which continues to force stringent containment measures in some cities.

In the context of the Russian-Ukrainian crisis, new industries are suffering from shortages or at least supply difficulties. It is natural to think of agricultural raw materials such as corn and especially wheat, for which Russia is the world’s leading exporter and Ukraine the third. But Russia also holds an important position in the production of important industrial metals such as nickel or palladium, while Ukraine has a dominant position in the production of several gases used in the semiconductor industry, such as krypton, xenon or neon (70% of the latter’s world production) .

These new tensions amplify pre-existing inflation, which continues to spread to various sectors of the economy, including even segments where we can talk about hyperinflation: trucking, energy, aluminum or some plastics. At the micro level, this portends more or less severe margin shrinkage for some companies this year, while the macro outlook itself is bleak.

How does Europe promote investment and be a source of opportunity?

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

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

As for growth in Europe in 2022, although we deviated from the ambitious targets at the beginning of the year, which were around 4%, the European Commission continues to forecast a level of 2.7% for the year, and then a growth of 2.3% in 2023. .

European stocks are also interesting in terms of their valuation. 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 undervaluation in the last 50 years.

On the other hand, there are strong differences between sectors and also between countries: for example, German or Austrian stocks are relatively low compared to the historical average, while Swiss and Portuguese stocks are at a fairly high level. All this speaks of a fundamental, sophisticated and selective approach to the European market. The importance of choosing the right stock (choosing company after company) has never been more relevant.

What are your prospects for economic recovery?

Olivier Mariscal : The motto for the coming months is FLEXIBILITY. Our discussions with companies confirm that inflation in Europe has not yet reached its peak because they continue to go through price hikes and that a second wage wave is underway (German unions are asking for an 8% wage increase by autumn).

The rate hike will continue to weigh on valuation multiples in the coming months (the PE Stoxx 600 average is trading at around 11.5x in early July vs. 16x at the start of the year). In the 1970s, in an environment similar to the one we know, the US market grew from 20x PE to 8x in 5 years.

Therefore, it is essential to invest in companies whose absolute valuation is already low, so as not to have a double risk on earnings in the event of a recession and contraction of multiples.

In partnership with BDL Capital Management