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This site is available to U.S. Qualified Purchasers only and provides information on our products, strategies and services. Please remember that past performance is not a guide to the future and that losses may be made.

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2020 Investment views

Key drivers for European equities in 2020

2 December 2019
Author: Ken HsiaPortfolio Manager

Key Takeaways

  • We expect 2020 to be a more balanced year for European equities.
  • Earnings growth should be supportive for the asset class.
  • Given the significant discount priced into cyclical sectors, there is potential for signs of improvement to drive stock prices higher.
  • 2019 saw some stocks and sectors sell off unfairly, creating opportunities for active stock pickers in 2020.
  • We will continue to seek out evidence-based investment opportunities that we believe will deliver good returns to investors over the long term.


Q&A with Ken Hsia on

European equity

European equities saw an improved environment in 2019. What will be the key drivers for asset class performance in 2020? Hear from the 4Factor’s Ken Hsia on the potential opportunities.

Q What is your view on 2019 and how does that influence your outlook for 2020?

2019 has so far been a good year for European equities, but this was largely driven by price-to-earnings (P/E) multiple expansion rather than improved company earnings growth.

At the time of writing, companies had only managed to grow their earnings by 1% on average over 2019 – a much lower figure than the gains made by stock markets over the year. In light of current market valuations, we believe it will be hard for stock market returns to continue to rise over a sustained period in the absence of stronger earnings growth. That means we expect European stock market performance to look more balanced in 2020.

That said, we expect diverse drivers to influence performance at the individual sector level and lead to an array of investment outcomes. This should create ample opportunity for active investors and underscores the importance of a robust and selective approach.

Q How has the backdrop changed?

We expect the economic impact of Brexit and US-China trade to be resolved, or at least clearer, in 2020. This clarity creates room for any positive signs around company earnings to lift equity market returns.

We see particular potential for this to play out in cyclical sectors. Relative to the US and China, exports play a greater role in European economies – making cyclical companies in Europe particularly sensitive to trade-related uncertainty. Valuations of these companies are currently discounted to reflect the current trade tensions. Should improving trade dynamics feed through to higher earnings expectations, we see significant potential for stock price rises.

Even if stronger earnings growth does not materialise in 2020, recent economic data releases lead us to believe that a weaker outlook for the economy is already being anticipated in market valuations. The Purchasing Managers' Index (PMI) indicators, for example, are generally at the low end of their historical band, which often coincides with a bottoming out of expectations. This can be compared to early 2018, when PMIs were at peak just before economic expectations weakened for two years.

We therefore believe any potential recession should be mild. Moreover, we would expect that if growth surprises on the downside, this will encourage companies to take the opportunity to rebalance their costs, which can be a positive for sustainable earnings growth.

Q Where are the potential opportunities and how are you positioning the portfolio?

New opportunities should arise as certain stocks and sectors have sold off unfairly for various reasons. We aim to capture such opportunities through our 4Factor investment process.

We believe some pent-up demand in economic activity will come through as geopolitical issues are resolved in Europe. Whilst we have reflected this in our current positioning, such as in financial and semiconductor stocks, we will continue to be on the lookout for new ones. Recently we have noted some potential in a few automotive and building material names.

We aim to maintain a balanced portfolio. Our analysis shows that valuations of quality stocks are at 20-year highs, leading us to ensure we continue to have clear valuation cases in stocks we purchase.

With this disciplined approach, we will continue to seek out evidence-based investment opportunities that we believe will deliver good returns to investors over the long term.


All investments carry the risk of capital loss.

Ken Hsia
Ken Hsia Portfolio Manager

Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, issued November 2019.

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