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MarketScape · 06.03.24

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.

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.

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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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IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

 

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

 

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.

 

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

 

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.

 

Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.

 

Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

 

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