Why invest in Europe’s recovery?

The fast view

• The need to spur on Europe’s post-pandemic recovery has initiated bold policy action that is supporting European equity markets.
• Proposals for an EU Recovery Fund make the combined European policy stimulus among the highest globally. Such funding at an EU level potentially takes a step towards greater fiscal alignment and may provide relief for European financials.
• Compared to the global financial crisis (GFC), this time around banks are part of the solution, not the problem and are key to the economy’s recovery.
• For investors, European equity markets offer attractive value and innovative companies benefitting from the changing world that we are facing. The 4Factor approach seeks to uncover these opportunities through disciplined bottom-up analysis, currently finding a range of interesting ideas emerging from the push towards renewable energy and a digital world.

Bold moves in tough times

Over the last five years, European equity markets have underperformed global equities (Figure 1) due to political and economic issues spawned by the GFC. Fiscal austerity, a dysfunctional banking sector and low lending growth combined to produce a slower recovery in economic activity and profitability than other parts of the world. This was compounded by persistent Brexit uncertainty, political stalemates in Italy and Spain, and US-China trade tensions. Then in the first part of 2020, COVID-19 put the brakes on economic activity. Such tough times, however, have led to bold policies.

The dramatic policy response appears to have put a floor under capital markets and laid the foundations for a recovery as lockdowns ease. As part of this three-part series, we consider current developments in Europe and why they make Europe a particularly interesting region for investors now.

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