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The rediscovery of European equities

By Olgerd Eichler

Like a phoenix rising from the ashes, the European stock market made a brilliant comeback in the last quarter of 2022. The outlook remains promising, as Europe has also got off to a good start this year and has been able to make up ground on the American market.

The valuation of the stock markets also speaks in favour of the European continent, because of their poorer long-term performance compared to the USA, many European companies seem to be downright bargains at the moment. Measured by the price-earnings ratio (P/E), for example, the discount is still just under 30%. For many investors who are still on the sidelines, this could be reason enough to look more closely at European shares again and take advantage of the price opportunities that present themselves.

Tailwind thanks to lower interest rates and a weak euro

Moreover, interest rates in Europe are still at lower levels, so equities are probably the better choice from a yield perspective compared to other asset classes. By contrast, the ratio appears less attractive in the US, where the sharp rise in interest rates now offers bond investors a real alternative to higher-valued US equities.

The weak euro also benefits local companies because export-oriented companies are more competitive in an international comparison. This makes it easier to pass on price increases to foreign customers and better compensate for inflation-related cost increases.

In 2022, Energy costs were one of the biggest concerns; the dependency on Russia brought Germany in particular to the brink of an energy crisis. But Europe has shown the necessary determination and successively reduced its dependence on Russian gas; well-filled energy storage facilities and the mild winter have helped to ease the situation. As gas prices have recently fallen significantly, the cost burden for companies and consumers in 2023 should not be as bad as feared in autumn.

Upside potential thanks to stable business models and attractive valuations

The past year demonstrated that during a difficult environment, Europe has once again proven that it is proactive in addressing its crises and does not stand by and watch. This is reflected in the decisive action of governments - be it regarding the sanctions against Russia, the joint support for Ukraine or the programmes launched to stabilise the situation of consumers and businesses.

With perceptions of European equities still weak by international standards and pessimism still prevailing among many market participants, Europe's outperformance could continue. Even if not all European companies are well positioned, there is a promising market environment - especially for stock pickers. This is because Europe has many companies with excellent business models, which are well managed and show promising growth opportunities. The low valuations of the markets offer good opportunities to buy these companies at attractive prices. This creates interesting price opportunities from which investors can profit through the right equity exposures in Europe.

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