Strong corporate sector makes European equities attractive, it is suggested

European equities have delivered strong returns in recent months and have outperformed the world over the past two decades but the region continues to receive bad press as an investment destination, it is claimed.

There is a mismatch between perception and reality yet the strength of the region’s corporate sector means that it is well positioned to continue generating attractive returns in the coming year, according to a new analysis from Stephen Macklow-Smith, portfolio manager within the European Behavioural Finance team at J.P. Morgan Asset Management.

‘As an investment choice, European equities have recently suffered from an image problem, dogged by perceptions of sluggish regional growth, high bureaucracy and poor productivity. And yet, European stock markets have consistently generated strong returns: in fact, over the past two decades, the MSCI Europe Index has steadily outperformed the MSCI World Index,’ he says in a new paper.

It examines why European equities have been consistently strong performers, indicates that export strength has powered an equity rebound and concludes that investors need to reconsider European equities.

‘European companies have been transforming themselves over the last two decades, helping drive consistent outperformance from European stock markets. Worries about deflation and sovereign debt defaults, as well as the chances of Europe suffering a Japan style lost decade, all appear overblown. Instead, the outlook for European equities appears attractive,’ he says.

He points to global leadership in exports, a competitive exchange rate, easy monetary conditions and economic recovery in the core eurozone economies in support of his arguments.

‘The efforts of the eurozone periphery to resolve its debt problems will undoubtedly have an effect on regional growth for some time. However, it is important for investors to remember two things: first, investors invest in corporate earnings, not in GDP growth, and corporate Europe is performing very well. Second, peripheral Europe is only a very small component of the MSCI Europe Index,’ he explains.

‘Of course, the debt crisis did shake confidence in the region, with the euro weakening significantly as the core eurozone was forced to bail out the periphery. But European companies have turned currency weakness to their advantage, with export strength powering a strong rebound in regional industrial activity,’ he adds.