2022 Investment Views: European equities

Navigating a more unpredictable European outlook as economies normalise

Increasing headwinds and unpredictability as Europe normalises post-pandemic.

Nov 24, 2021

4 minutes

Ken Hsia
Increasing headwinds and unpredictability as Europe normalises post-pandemic.

The fast view

  • Exceptional levels of stimulus have supported post-pandemic regional markets, but economies have yet to catch up.
  • Expect more unpredictability in 2022 as valuation levels and inflation present headwinds.
  • A pro-cyclical stance means we are overweight banks and the consumer discretionary sector.
  • We are also exposed to sectors with pricing power such as paper and packaging, and steel.
  • Lower beta sectors which benefitted from low rates are set to struggle.
  • We are underweight healthcare and consumer staples.
QThere is a lot weighing on European sentiment – national elections, the pandemic, the ECB and post-Brexit bickering. What is the effect on regional markets?

With all those headlines, we might have expected more volatility from regional stocks. Yet markets are at their all-time highs and 60% above the March 2020 pandemic lows. While Europe has benefitted from exceptional levels of stimulus, in GDP terms many of its economies have not yet normalised and in some cases are only now approaching 2019 levels of output.

QWhat are you expecting for 2022?

Almost certainly, there will be more unpredictability. With markets at new peaks, and trading on 16x price-earnings multiples versus a long-term average of 14x, we are now meeting some headwinds. Supply chains are an obvious one, but these are being fixed, and in retrospect, I don’t think they will be regarded as significant. More important are rising energy prices, leading to higher inflation. This could be an issue as Europe is a net importer of oil, gas and other energy sources.

QSo, energy and inflation are interlinked risks. How does that feed into sector opportunities?

While rising energy prices offer a tailwind for the producers, that reverses for companies where energy is a large cost component - we are not exposed to airlines, for example. Elsewhere, we are overweight banks as they are set to benefit from loan growth currently at higher levels than at any time over the past decade, while a normalising interest rate environment means lending margins should also expand. Valuations here do not yet reflect the more attractive outlook, especially on a 10-year view.

QAnd elsewhere, what is your investment strategy?

We are pro-cyclical, which means that we try and maintain a balanced portfolio, keeping our beta close to one. Apart from banks, we are also overweight consumer discretionary, where the pandemic induced closing and reopening of economies has resulted in very mixed earnings momentum and led to a derating for some e-commerce retailers. We believe this is a structurally growing sector.

Against the backdrop of rising inflation, we are also exposed to sectors with pricing power, which enhances the quality of returns over a cycle. This includes paper and packaging, and even steel, where China’s policy of reducing exports reverses its trend of flooding the rest of the world with cheap steel, which should have positive pricing dynamics.

Our underweights include lower beta sectors, which had benefitted from the low interest rate environment, but will now face increasingly negative operating dynamics. This includes healthcare and consumer staples, where raw material price inflation is pressuring margins.

Authored by

Ken Hsia
Portfolio Manager

Important Information

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

This communication is provided for general information only and is not an invitation to make an investment nor does it constitute an offer for sale. Investment involves risks. This is not a recommendation to buy, sell or hold a particular security. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The securities or investment products mentioned in this document may not have been registered in any jurisdiction.

This communication may include hyperlinks which lead to websites published or operated by third parties. Providing the hyperlink does not imply any affiliation, sponsorship, endorsement, approval, verification or monitoring of any information contained in the third party websites. Ninety One has not reviewed any third party websites for accuracy or completeness and is not in any way responsible for the content of any third party websites. Using or following the hyperlinks is at your own risk.

In Hong Kong, this communication is issued by Ninety One Hong Kong Limited and has not been reviewed by the Securities and Futures Commission (SFC).

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2021 Ninety One. All rights reserved.

Past performance figures shown are not indicative of future performance. Investors are reminded that investment involves risk. Investors should refer to the offering documents for details, including risk factors. This website has not been reviewed by the SFC. 

By clicking on the hyperlink of Investor relations below, you are leaving this website with information specific for retail investors in Hong Kong and entering the global website.

Please note that the global website is not intended to target Hong Kong investors. It has not been reviewed by the Hong Kong Securities and Futures Commission (“SFC”). The website may contain information on funds and other investments products that are not authorised by the SFC and therefore are not available to retail investors in Hong Kong. The website may also contain information on investment services / strategies that are purported to be carried out by a Ninety One group company outside of Hong Kong.

Any product documents and information contained in this website are for reference only and for those persons or entities in any jurisdictions or country where the information and use thereof is not contrary to local law or regulation.

Issuer: Ninety One Hong Kong Limited
Email: [email protected] 
Telephone: (852) 2861 6888 
Fax: (852) 2861 6861