European market rallies are transitioning to long-term bull markets

June 24, 2021

Jeffrey Sacks

Head of EMEA Investment Strategy

Aerial view of the solar power plant on the top of the mountain at sunset

SUMMARY

As a post-COVID economic rebound takes hold, both UK and European equity markets offer exposure to our favored areas. These include COVID cyclicals, value, midcaps, dividend growers, and green stocks.

Overweight UK equities: UK equities have rallied 27.5% off their November 2020 lows, but have much further to go. GDP growth in 2021 could exceed 7% and average earnings per share growth could exceed 50%, supported by accommodative monetary and fiscal policy, along with great vaccine progress. The market is cheap in absolute terms and relative to other markets, and the high average dividend yield of over 3.5% compares favourably with average fixed income yields. The post-Brexit and post-COVID roadmaps could encourage further investor interest.

Overweight European equities: The vaccine rollout has progressed, with much more momentum in the last few weeks. European Central Bank policy remains very supportive, while the EU Recovery Fund implementation is likely to gather momentum over the summer. Alternative energy is a powerful long-term growth driver, supported by increasingly ambitious government initiatives. Alongside green stocks, other investment avenues may include COVID cyclicals, value, midcaps and dividend growers.

Underweight fixed income: Sovereign bonds remain expensive. In the current environment of negative real yields, there are selective potential opportunities in the corporate bond market, particularly amongst high yield bonds.

Favour sterling over the euro: 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.