European equities got off to a good start in 2021 and small caps may be the place to be as the year moves forward, according to Maarten Geerdink, head of European equities at NNIP.
“Markets are up about 2.5%, and there’s quite a positive rotation where the more cyclical sectors have started to outperform, pricing in a bit of good news for the rest of the year,” he says.
Geerdink believes 2021 looks like a promising year for equities; and European equities particularly.
Like many other European asset managers, he thinks Brexit resolution, ongoing vaccine rollout (assuming it runs smoothly), and the removal of risk factors related to the US elections, will prove supportive for European equities.
But an additional positive drive for the European equity space will be the upcoming European recovery plan, which is expected to boost confidence in the economy and markets.
For Geerdink, the winners of this fund will be small caps.
“There are a lot of small-cap companies offering energy solutions in Europe, and if you want to benefit from the transition to a climate-neutral economy, for example, you’ll probably find a lot of opportunities within the European small cap space, a lot of companies that are really well positioned for earnings growth.”
Sector focus
When it comes to stock selection, at NNIP, the focus is on sectors rather than on countries.
After tech-heavy companies thrived in the first six months of the pandemic, now sectors like materials, leisure and energy are positioned to benefit from the economic reopening that’s expected in the second half of 2021.
“It’s the equity markets that basically trade on earnings expectations being revised up quite aggressively for the cyclical sectors, versus the more stable or even negative revisions for the defensive sectors,” Geerdink argues.
Looking at the selection of countries, he says: “The country-specific risk has somewhat disappeared for equities. A lot of the countries in our investment universe operate on a pan-European scale, while there has been further European integration, especially when it comes to the ECB side.”
What is going to be the watchword for invest managers in 2021? The answer is ‘adaptability’ according to Geerdink.
“The vaccine rollout is not a straight line, there will still be unknowns arriving in 2021, and you want to have an adaptive approach to get your positioning correct within European equity markets,” he concludes.
Volatility
Margarita Shevtsova, senior portfolio manager equity at Actiam also believes there is reason to be positive on European equities in 2021 though suspects there will be a few bumps in the road.
“Stock markets are anticipating an economic recovery in Europe in 2021, although how far the economy will bounce back is not yet clear. Investors can expect extra volatility to continue in the first half of 2021 on the back of the covid-19 news.”
Despite a slower than expected roll-out of vaccines, extra lockdown measures and consequently slower re-opening of economy, Shevtsova believes there is ample liquidity in the system and forthcoming fiscal and monetary stimulus measures of central banks in Europe and worldwide will support a steady economic recovery.
Therefore, she argues that the first quarter of 2021 might even constitute the early phase of an economic expansion. “A portion of this seemingly infinite liquidity provided by central banks unsurprisingly ends up in equities, supporting the optimistic and risk-on sentiment.”
Shevtsova points out that we have already witnessed the rotation into value in the fourth quarter of 2020 with the boost of financials, energy and materials sectors.
She expects this style rotation to continue in the first half of 2021.
Tech and ESG themes
Does this mean the end of the technology-led and ESG-led boom we saw recently?
“Not necessarily, although some pause is likely due to the stretched valuations,” Shevtsova says. “The primary reason is again liquidity. With risk-free rates still hovering around record lows, risk assets with huge growth potential, like technology firms and renewable energy providers are likely to be the winners.”
She adds that another support for stocks operating in sustainability investment themes could come from the renewed focus on the social aspect of ESG, spurred by the covid-19 pandemic, as well as self-help from the increased ESG disclosure.
