Is now the time to buy European Equities?
European equities are at all-time highs, notwithstanding recent flare-ups in the Iran conflict. In a recent note, JPMorgan said that they are taking a constructive view of European equities, noting that earnings are picking up after three subdued years.
Firm analysts say they don’t expect inflation expectations to be de-anchored, and this might be supportive of smaller ECB hikes than those already priced into the markets.
JPMorgan thinks this is a good time to buy European equities for a variety of reasons. The analysts claim European stocks are by and large seeing improving earnings, are trading cheaper than their American peers, and are delivering higher shareholder returns.
They also believe that an increasingly supportive regulatory environment is driving increasing M&A volumes, which have already been steadily rising since their low point in 2023.
“Eurozone PMI, credit growth and earnings revisions are all on the uptrend, with CESI hitting a 2-year high. After an outperformance vs the US last year, of 7% in LC terms, total return, Eurozone equities are just about ahead again this year, at 12% vs 9%, respectively,” JPMorgan stated.
While firm analysts think the latest Momentum unwind has been maturing, they still recommend the call for rotation and broadening into 2H, adding that AI likely will not be the only story in town.
The investment bank anticipates a pickup in shareholder activism in Europe, as European equities broadly are undervalued, have identifiable governance, capital allocation, or operational value levers, and are not in financial distress. They often have resilient cash generation, but persistently face a valuation discount compared to U.S. peers.
The analysts note that the sectors most frequently targeted for activism are Industrials, Consumer Discretionary and Tech, adding that campaign volumes are high in the U.K., Germany, and France specifically. They say that while the region has been constrained by a fragmented regulatory regime thus far, a newly proposed SRD III revision might likely prove to be the catalyst needed to accelerate activism there.
While previously Business Strategy was the most important objective among activists, the new focus of interest is capital allocation, the analysts noted. And so growing demand for capital return to shareholders, share repurchases, and dividend distributions are becoming a more frequent post-campaign outcome.
Countries like the U.K., France and Germany have a higher proportion of stocks that trade below book value compared to peers like the U.S. Accordingly, the European market contains many attractive targets for M&A. The analysts say this trend is even more salient given the surge in worldwide dealmaking and the increasing interest in the pursuit of scale and global relevance.
