M&G Investments is backing a revival in Europe.
The firm said in an article on its website that European value stocks outperformed the broader market in 2024, with this move driven by what it calls ‘resilient’ banks. On top of this, it believes the substantial valuation discount relative to US stocks offers a unique opportunity for value investors, highlighting what it thinks is the Continent’s compelling case for substantial returns in a dynamic market.
Richard Halle, fund manager for value equities, said: “2024 proved to be another positive year for the value style in Europe. Despite a volatile backdrop, fuelled by political risks, growth concerns, and evolving views on the direction of interest rates, value stocks outpaced the broader European market and their growth counterparts.”
He added: “This outcome has defied expectations, as value stocks are generally perceived to struggle in a rate-cutting environment. Although the European Central Bank reduced borrowing costs four times last year, the value style has arguably benefited from fewer rate cuts than initially anticipated.”
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Halle said it was noticeable that European bank stocks had outperformed the tech-driven Nasdaq and has underscored market confidence in their resilience and adaptability even among challenging conditions. The market, he added, has overestimated the impact that lower rates would have on their business.
“At the beginning of 2024, many sell-side analysts were predicting headwinds for banks. However, we believed that European banks were attractively valued and had undergone significant evolution in recent years. They are now extremely well-capitalised, possess robust balance sheets and have consolidated within the region, thereby enhancing their competitiveness,” he said.
“In our assessment, banks were acutely aware that rate cuts were on the horizon and have been hedging themselves for this. Coupled with the fact that we do not anticipate a return to another zero-interest rate period in the near future, we think their profitability is unlikely to decline sharply.”
