The Road to Recovery: Europe Well-Positioned to Deliver Sustainable Profit Growth and Shareholder Value
Europe set for a cyclical recovery, offering attractive investment opportunities.
Reduced political risk fuelling investor confidence.
Europe on a path to deliver sustainable profit growth for first time in a decade.
London, (July 14, 2017) – Following a period of economic uncertainty, Europe’s recovery has gathered speed over the last year and the outlook has improved considerably. In its recent edition of EMEA Perspectives, J.P. Morgan Private Bank’s Grace Peters analyses the current investment landscape in Europe and shares her views on why Europe offers a rich source of attractive investment opportunities.
“Europe’s economy is picking up pace and investors are becoming more confident about the ability of European businesses to drive profitability and shareholder value,” said Grace Peters, European Equities Strategist at J.P. Morgan Private Bank. “Fund managers expect global growth and corporate profits to be strong over the next 12 months, and investment flows into Europe have picked up this year. In fact, figures published in May by Eurostat reveal Eurozone GDP increased by an annualized rate of 2.0% in the first quarter, which is a faster rate of growth than the 0.7% reported for the U.S. Indications are for further acceleration in the second quarter.”
A pickup in inflation, commodities and global activity led to the return of revenue in the Eurozone and a large contribution from operating leverage to earnings per share growth. Official monetary policies remain supportive for growth, and the ECB has kept its main rate at zero and the one it pays on bank reserves at -0.4%. In addition, while political risk in Europe has troubled investors throughout 2016 and 2017, the risk of a populist outcome has diminished following the French presidential election. The result was a pivotal event in French politics and positive for European stock markets.
Peters explained: “Eurozone equities have outperformed U.S. markets this year, reflecting an improving opportunity set. After several years of no top-line growth, Europe is starting from a low base and the gap between U.S. and European margins have widened considerably over the past decade. European margins decoupled from those in the U.S. for cyclical and structural reasons, and we believe that Europe’s depressed margins represent an opportunity. If margins can expand in 2017 and 2018, the region may be on a path to delivering sustainable profit growth for the first time in a decade.”
A change in corporate behavior will also provide confidence to investors, demonstrating that firms are able to sustain their profits over the long term. Peters explained: “We believe a greater focus on simplifying corporate structure, addressing underperforming businesses, tighter benchmarking and wider sharing of best practices could boost margins significantly. Encouragingly, European companies appear to be re-emphasizing shareholder value. Many industries in Europe remain extremely fragmented and M&A is likely to feature as companies seek to sharpen focus and deepen market penetration. When markets consolidate, there is typically an improvement in financial returns for the whole industry.”
Across Europe, many companies have embraced research and development, technology and innovation to drive premium positioning with a quality product, and customer service to match. Motivated by tighter labor laws, automation is often seen as essential to increasing productivity, while bringing down costs, and these trends have been especially evident among smaller companies. According to Peters, “the financial benefit of these investments has been hidden so far by the weak top-line environment. With inflation returning, premium products should be able to command greater pricing power. Price rises tend to fall straight to the bottom line and enhance operating leverage.”
Peters concludes: “As home to many leading international businesses, we believe Europe offers a rich source of attractive investment opportunities. The key is to identify those companies that are well managed and have the competitive position and vision to grow their earnings well into the future.”
About J.P. Morgan Private Bank
J.P. Morgan is a global leader in financial services to corporations, governments, for-profit and not-for-profit institutions and wealthy individuals. Through its private banking franchise, the firm delivers customized wealth management advice and solutions to wealthy individuals and their families, leveraging its broad capabilities in investing, estate planning, family office management, philanthropy, credit, fiduciary services and special advisory services to help its clients advance toward their own particular goals.
For more than 150 years, the Private Bank’s comprehensive and integrated product offering, commitment to innovation and integrity, and focus on placing the interests of its clients first and foremost have made J.P. Morgan an advisor of choice to people of significant wealth around the world.
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