Growth, Politics and Shareholder Activism: European Equities in Focus

Episode Summary

Executive Summary: Goldman Sachs strategist Sharon Bell says European equities have been broadly flat in 2018, lagging the U.S. but holding up better than emerging markets. She argues the market is favoring growth, quality, and balance-sheet strength over cheap value stocks amid low bond yields, modest growth, political uncertainty, and persistent Brexit and trade risks.

Main Topics: European equity performance and outlook (Priority: 5/5): European stocks were roughly flat year to date, with sentiment subdued but not disastrous. Bell sees a generally constructive backdrop if major political and trade risks do not worsen. Factor performance: growth vs. value (Priority: 5/5): Growth, innovative companies, and firms with strong balance sheets outperformed value, helped by low rates, modest growth, and a preference for structural growth stories. UK market, Brexit, and domestic vs. international exposure (Priority: 4/5): Brexit headlines created uncertainty, but the FTSE 100 was insulated by its global revenue mix and weak sterling, while purely domestic UK stocks faced valuation pressure. European politics and investor sentiment (Priority: 5/5): Italian elections, populism, and coalition politics heightened risk premia across Europe; France was a relative bright spot thanks to Macron and pro-growth reforms. Trade tensions and export sensitivity (Priority: 4/5): US-China and broader tariff fears weighed on sentiment, with German and Swedish markets more exposed to world trade than Switzerland, though actual corporate impact was limited. Euro movement and earnings (Priority: 3/5): A weaker euro is generally supportive for European corporates because it boosts translated overseas earnings and competitiveness, though the move was not dramatic enough to be a major earnings driver. Policy divergence, buybacks, activism, and private equity (Priority: 4/5): Europe trails the U.S. in buybacks and shareholder-return policies, but activism and PE are growing as companies seek restructuring and value creation opportunities.

Key Arguments: European equities were flat in 2018, which is disappointing relative to U.S. returns but acceptable versus emerging markets. Investors preferred growth and balance-sheet strength because Europe lacked accelerating economic growth and bond yields were very low, lowering discount rates for long-duration growth assets. Big value sectors such as telecoms and banks underperformed due to structural issues, not just cyclical weakness. Brexit uncertainty hurt UK domestic stocks more than the FTSE 100 because the index is dominated by international businesses and commodity exporters. Italian political developments increased risk because populist parties raised concerns about anti-euro rhetoric and fiscal expansion. France improved investor sentiment after Macron's election, but his reforms did not eliminate broader European populism concerns. Trade tensions hurt sentiment, but Europe is less exposed than emerging markets; Germany is the most trade-sensitive major European market. A modestly weaker euro supports European earnings, especially for companies with meaningful U.S. revenue exposure. Europe's lower buyback culture reflects higher dividend payouts, different incentives, and more caution in a less certain environment; buybacks should rise but remain below U.S. levels. Activism and private equity are increasing in Europe because there are many conglomerates and restructuring opportunities, and low rates make financing easier. ECB policy support helps peripheral Europe and banks, but low rates create a future risk because the euro area has less room to cut in a downturn. European equities could deliver positive returns if the main geopolitical and policy risks do not escalate, with earnings growth still solid though below the U.S.

Data Points: European equities year-to-date performance: roughly flat - Bell's description of European stock market performance in 2018 U.S. equities year-to-date performance: up about 5% - Comparison with European equities Emerging markets year-to-date performance: down 5% to 6% - Comparison with European equities European economic growth: about 2% - Bell's characterization of current European growth UK GDP growth: about 1.5% this year and next year - Projected UK growth versus Europe Europe GDP growth forecast context: more like 2% - Implied growth rate for Europe versus the UK Italian budget timing: end of September - Highlighted as a risky market juncture for Italian assets French market performance: one of the best performers this year - CAC 40 strength linked partly to growth stocks and Macron's government European earnings growth this year: 9% to 10% - Expected earnings growth supporting equities European earnings growth next year: about 6% - Forecast for the following year European short-term rates: negative 40 basis points - ECB policy stance and limited easing room U.S. buybacks this year: over $600 billion - Scale of corporate repurchases driving U.S. equity demand European buybacks this year: around $50 billion - Much smaller buyback pool than in the U.S. European dividend yield: just under 4% - Higher cash return to shareholders versus the U.S. U.S. dividend yield: around 2% - Comparison to Europe CEO compensation linked to shareholder returns in S&P 500: almost 80% - Explains stronger buyback orientation in U.S. corporates Company exposure to the U.S.: about a fifth of company earnings and sales - Why euro weakness can support translated earnings

Pivotal Quotes: "They haven't performed super well. They're roughly flat this year." — Sharon Bell: Overall assessment of European equities performance "The things that have done really well this year have either been growth companies... or companies with very strong balance sheets." — Sharon Bell: Explaining why growth and quality factors outperformed value "I think that last point is absolutely on the ball." — Sharon Bell: Agreeing that Europe lacks policy headroom in the next downturn

Implications: European equities look attractive only if political shocks, trade escalation, and Brexit worsen no further. Expect continued preference for quality/growth, modest but positive earnings, limited buybacks, and ongoing scrutiny of policy headroom in the euro area.