Europe: Delta variant slows economic recovery

August 2, 2021

Jeffrey Sacks

Head of EMEA Investment Strategy

SUMMARY

The resurgence in COVID-19 infections may have slowed the European economic recovery but is not expected derail it. We remain ‘Overweight’ on European and UK equities, and ‘Underweight’ fixed income.

After a challenging summer of rising hospitalizations and slowly rebounding services sectors, we expect stronger growth to resume later this year and into 2022. The earnings recovery looks assured for this year, valuation multiples are inexpensive, average dividend yields are well above the global average, and ownership levels remain low.

Both fiscal and monetary policies remain firmly accommodative. As we seek higher quality companies as the cycle matures, Europe offers a large number of companies with reputable management, strong cashflows, and the ability to grow dividend payouts.

Over time, as the markets fully discount the end of the pandemic and reflect the better-than-expected Brexit outcome, along with regional leadership in green energy initiatives, we expect perception of the region to improve substantially.

Sovereign bonds remain expensive, especially after the recent rally driven by renewed COVID concerns. In the current environment of negative real yields, there are selective potential opportunities in the corporate bond market, particularly among high yield bonds.

The pound sterling continues to benefit from inflows driven by pent-up demand for all asset classes and is inexpensive in valuation terms. The euro faces further consolidation as the European Central Bank is expected to remain more accommodative for longer than other central banks.