David Lambert, Head of RBC European Equity & Senior Portfolio Manager, RBC Global Asset Management (UK) Limited, shares his thoughts on 2024 and the year ahead.
2024 was a mixed year for European equities, as we saw a strong rally to May, followed by a period of flat markets.
Election upheaval in Europe hasn't proved a great backdrop for domestic demand per se. However, European companies are typically very global in nature, so are only somewhat affected by events close to home.
A key factor that has impacted European equities is China and Chinese domestic demand. China is one of the bigger trading partners within Europe, and the softness we've seen there hasn't been constructive for Europe.
However, the peripheral countries have been a bright spot. In Spain and Italy, the financials sector has helped pull equity markets higher.
We see plenty of opportunity within Europe to take advantage of global capital allocation and to benefit from double-digit earnings growth. If we ally that with the valuation base, from both an absolute and relative perspective, Europe looks cheap.
We would never expect Europe to trade on a par with the US, given the latter’s higher return and growth. However, with earnings growth picking up, we might see the valuation gap drop. That bodes well for Europe overall.
European companies, as well as consumers, are probably more rate sensitive than other regions. If we expect the ECB to continue cutting aggressively, and maybe more than the Fed might do, in relative terms, then this could benefit the European equity space.
Watch time: 4 minutes, 46 seconds
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David Lambert
Senior Portfolio Manager, Head of European Equities
RBC Global Asset Management (UK) Limited
David Lambert: 2024 has been a mixed year because we saw some really strong growth for European equities from October 2023, where markets were up 20% through to May, and then we've gone sideways. It's been a year of two halves, as such. There's been a lot going on in the European landscape with respect to French politics.
We've obviously seen the far-right make ground and then the far-left in the ultimate government come through. In Germany, we've also seen political upheaval with a new election coming through, potentially in February next year. And in the UK, we've had elections. There's been a lot going on underneath. This hasn't proved a great backdrop for domestic demand per se. But we always have to remember that what we're looking for with respect to European equities is the global reach that we see.
Europe is only a third of European revenue exposure for European corporates. Actually, what's happening in Europe isn't necessarily as important as what's going on in the rest of the world. Now, the other big thing that's impacted European equities is what's been going on in China and Chinese domestic demand. China is probably one of the bigger trading partners we have within Europe. That softness we've seen in China also hasn't been particularly constructive for Europe.
Notwithstanding that, we've seen about 3% earnings growth. Fairly pedestrian earnings growth this year with some of the cyclical sectors, technology, in particular, putting pressure on earnings. As we look forward going through, we expect this to dissipate and improve. This year, I would categorize it as a mixed year. We've seen positive growth in markets themselves, but it's been sideways tracking for a long period of time.
There's also been a bright spot within Europe, and that's been the peripheral countries. Spain and Italy in particular, we've seen some really good GDP growth numbers, but also some very impressive performance from an equity market as well. This is an area of positivity within Europe. We're seeing GDP growth in Spain, for instance, at well above 2.5% coming through this year. Spanish banks, Spanish financials, Italian financials have all been very strong. That's been a bright spot for Europe and we expect that to continue going forwards.
As we look forward, into 2025, I think we kick on from the pedestrian growth of 3% earnings growth we had this year, and we look forward to double-digit earnings growth. Now, I think there's a couple of interesting aspects. Obviously, we've got clarity with respect of the UK from a government perspective and the budgets out of the way. We'll have more clarity in Germany with these elections now coming in early February next year, and France might be able to sort itself out as well. That clarity might give us a little bit more confidence with respect to domestic exposure within Europe.
Notwithstanding that, obviously, we've got a lot of things coming down the pipeline. China, we would hope, would rebound off a very low base. We're yet to see what happens with the U.S. post the elections, in terms of tariffs, et cetera. Ultimately, we have to bring this back to what we're looking at on a European company level, and that's how European, normally global corporates that have the ability to allocate capital anywhere in the world, where they can earn higher returns at a decent growth rate, where they can capitalize on those areas of growth on a global basis. We see plenty of opportunity within Europe to take advantage of that and to take advantage of this double-digit earnings growth. If we ally that with the valuation base, and if we look from an absolute perspective and a relative perspective, Europe looks cheap on both counts.
As a consequence, we feel as though we're underpinned from a valuation perspective. If we see this earnings deceleration, then we're quietly confident that we could see this double-digit earnings growth also potentially a re-rating as well, as maybe the gap between U.S. valuations and European valuations narrow somewhat. We would never expect Europe to trade on a valuation on par with the U.S. given the U.S.'s higher return and has higher growth. But actually, given the disparity right now and the earnings growth picking up and that earnings disparity, so the growth of the U.S. minus Europe actually starting to close, we might see that valuation gap drop. That bodes positively for Europe as a whole.
The one thing we should bear in mind is that European companies as well as consumers are more rate sensitive than probably other regions of the world. If we expect the ECB to continue cutting aggressively, and maybe more relative than the Fed might, then actually maybe this will also be a benefit to the European equity space as well.