Financial Publisher Citywire recently published the results of a survey of 400 fund selectors, showing that almost nobody expected to allocate to European Equities in 2023.
Chi Chan, European Equities Portfolio Manager at Federated Hermes Limited, believes it is time to take a chance on Europe. Below Chi outlines why Europe breeds winning companies, that the European market is more geographically diversified than the global one and why equities are the best hedge against inflation.
Chan said: “The muted economic growth prospects expected in Europe compared to other regions, geopolitical challenges, structurally higher inflation and the underlying so-called ‘uncompetitiveness’ of Europe were all concerns resulting in this view. While we agree that these are all legitimate worries that should be incorporated into stock analysis, we would also counter that these do not guarantee underperformance for European markets.”
So far, we have made the case for Europe – but what about the case for equities? Theoretically, rising interest rates would increase the WACC and reduce valuations. However, that should already be considered by using through-the-cycle assumptions of discount rate.
“More importantly, during times of higher inflation, equities offer a natural hedge. Companies feel the pain of inflation through rising employee costs, rent, raw materials, and so on, but they also benefit from the higher prices that they sell their products for. However, not all companies experience inflation in the same way. Those that offer a high degree of value-add relative to the cost of their products find it much easier to push through price increases and are net beneficiaries. Conversely, those without pricing power will feel pressure on both the top line and the expenses line.”