Long-Term Opportunities in European Value Stocks
European value stocks offer a compelling case for short- and long-term investment opportunities, supported by strong fundamentals, attractive valuations, and favorable market conditions.
- Value
- Equity
- Portfolio Construction
- Volatility & Risk
Key Points
What it is
European value stocks represent shares of companies in Europe that are trading below their intrinsic value, often due to market overreactions or temporary setbacks.
Why it matters
These stocks are noteworthy, due to their potential to provide diversification benefits and resilience in various market conditions.
Where it's going
The outlook for European value stocks suggests potential for continued growth and normalization of valuations, driven by improving earnings and supportive fundamentals.
For investors seeking long-term opportunities, European value stocks present a compelling case. They potentially offer strong medium-term returns due to their attractive valuations. To achieve optimal outcomes in this space, we believe a comprehensive approach that avoids and focuses on well-rewarded risks is critical. Let’s take a closer look.
European value stocks seem well-positioned for potential gains. Historically, these stocks have outperformed growth stocks in Europe by 2.4% annually over the past 34 years. The fundamentals and profitability of European stocks remain strong, and the current macro environment supports value stocks. Over the next five to 10 years, key market drivers will include growth restraints — forcing markets to refocus on fundamentals, and inflation adaptation. Elevated inflation and interest rates will provide in the short term. The fundamentals of European and value stocks look promising with attractive valuations and improving earnings growth. Interestingly, European value stocks are trading at a 20% discount to their historical average, a discount not seen often before. Our computations show that this might lead to an additional 5% per year in performance in future years — on top of their high 3%+ dividend yields — as the discount normalizes.
Success in European value investing requires a diversified approach that focuses on well-rewarded risks. To this end, we use a multidimensional, sector-specific approach to holistically assess a company’s value and select the best-priced value stocks. Evaluating a company’s business model and financial health through quality factors, along with using to assess positive market sentiment, aids in the careful selection of stocks and avoids value traps and falling knives. At Northern Trust, we believe that risk-efficiency is crucial for investment success. It is instrumental to assess all dimension of risks, from sectorial, to stock-specific and carbon-related risks, and manage risk carefully to optimize the return-risk trade-off.
Ultimately, European value stocks offer a compelling short- and long-term , driven by attractive valuations and supportive market conditions. By adopting a diversified, holistic, and risk-aware value approach investors can navigate the complexities of this market and leverage its potential.
Source: Kenneth French Data Library, Northern Trust Asset Management.
Tailwinds refers to favorable external factors or conditions that help drive positive performance or growth in a particular market, sector, or investment.
Central bank concessions are policies or actions a central bank implements to address economic challenges or support specific sectors, including interest rate cuts, quantitative easing, targeted lending programs, and regulatory flexibility.
Momentum factors refer to the tendency of assets that have recently shown strong performance continue performing well in the short term.
This factor targets companies that trade at low current valuations. Value strategies seek to provide excess returns as companies grow and their current valuations become more in line with normalized and prospective valuations.
Main Point
The Appeal of European Value Stocks
European value stocks offer compelling short- and long-term investment opportunities. By adopting a diversified, holistic, and risk-aware value approach, investors can navigate the complexities of this market and leverage its potential.
Upgrading Equities Over Bonds
Guido Baltussen
Head of Quantitative Strategies — International
Guido Baltussen is head of quantitative strategies international at Northern Trust Asset Management, leading various aspects of business development, research, innovation, and thought leadership. Based in Amsterdam, Guido oversees the firm’s expanding international quantitative teams in the Europe, Middle East, Africa (EMEA) and Asia-Pacific (APAC) regions.
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