UK and European equities offer more than just short-term recovery rallies

May 20, 2021

Jeffrey Sacks

Head of EMEA Investment Strategy

SUMMARY

With a post-COVID recovery beginning to take shape, we are overweight UK and European equities as they offer particularly good exposure to investment areas we favor globally COVID cyclicals, value, midcaps, dividend growers, and green stocks.

We are overweight UK equities which have rallied 27% off their November 2020 lows, but have much further to go. GDP and EPS are growing strongly this year, supported by accommodative monetary and fiscal policy, along with great vaccine progress.

The UK market is cheap in absolute and relative to other markets, and the high average dividend yield of 4% compares favourably with average fixed income yields. Early logistical and administrative challenges from leaving the European Union are no worse than expected. We believe that early challenges in implementing the Northern Ireland protocol will be overcome.

We are overweight European equities. The vaccine rollout is accelerating, with Europe around 6 to 8 weeks behind the UK. 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. Italy’s new PM Draghi – the former ECB chairman – is positive for Italy, for peripheral Eurozone countries more broadly, and for European solidarity.

Both UK and European equities offer particularly good exposure to the areas we favour globally: COVID cyclicals, value, mid-caps, dividend growers, and “green” stocks.