A supportive value backdrop

As a value manager, the outlook looks attractive. This is not to discount the challenging macro and geopolitical backdrop, or suggest that the value style won’t suffer short-term setbacks after more than five years of strong relative returns. But, history does suggest there could be more value market leadership to come.

Over the last 50 years, there has only really been one period of sustained value underperformance, from the end of the global financial crisis in 2009 to the recovery from the Covid pandemic in 2021. This period was characterised by ultra-low interest rates and a macro backdrop that was generally much more conducive for growth investing. If we are now in a more normal interest rate environment, then markets may continue to reward a pure value style approach.

Despite the strong value rally of the last few years, valuation spreads between expensive and cheap stocks in Europe remain unusually wide—levels last seen around the height of the Global Financial Crisis. That backdrop matters for portfolio construction: European value can offer both a potential valuation mean-reversion opportunity and meaningful diversification, particularly for investors heavily exposed to US growth. In particular, the MSCI Europe Value Index has historically shown a very low correlation with the Russell 1000 Growth Index. As investors reassess concentrated positions in US tech and AI related stocks—where valuations still look rich—there is clear scope for European value spreads to continue normalising from here.

Avoid the value traps 

Value as a style may be back in favour, but value stocks are not, on the face of it, comfortable investments to make. They are cheap because they are out of favour with the market and have probably been marked down by some kind of business-specific or industry-wide issue. To find stocks that have the potential to re-rate higher, and avoid stocks that are cheap for a good reason, we look for companies that are not only trading on low cash-flow and earnings multiples, but that are also supported by positive operating momentum and strong quality characteristics. This approach helps weed out the value traps, which if not detected can act like landmines in your portfolio, detonating without warning.

Get comfortable with the uncomfortable

One area where we’re starting to find value opportunities emerge is in European telecoms. The sector has been a serial underperformer for the best part of the last 15 years, dragged down by pressures on pricing and volumes. So it’s been quite an uncomfortable place to start investing. Nevertheless, we’ve recently moved overweight in the sector, attracted by gradual signs of improvement in pricing, a pick-up in consolidation, and the defensive qualities that telecom stocks provide in today’s uncertain markets. 

One of the European telecom operators that we like most is Deutsche Telekom. This is a cheap stock, offering a high free cash flow yield, inexpensive valuation and attractive total cash return, based on dividend payouts and share buybacks. However, the stock is fundamentally sound, supported by a strong position in its domestic market and growth opportunities in the US via its T-Mobile business, while the company is also improving its balance sheet position by paying down debt.

Overweights in energy and banks 

As well as telecoms, we continue to find opportunities in the energy sector. We’ve actually been overweight energy stocks since the third quarter of 2025, well before the Strait of Hormuz was blockaded and surging oil and gas prices lifted cash flows and earnings forecasts across the sector. Back then, investing in energy companies was anything but comfortable, with the sector having underperformed significantly over the previous two years and oversupply concerns exerting downward pressure on oil prices. 

Today, the situation has been transformed by the Iran conflict. The upside potential for energy company cash flows, and for share prices, looks very attractive, with our analysis suggesting that free cash flow yields in the sector could rise above 20% this year in the event of an extended disruption to shipping through the Strait. 

Another key position for the fund is in the banks sector, where we’ve been overweight since October 2020. Again, this was not a comfortable time to invest in Europe’s banks, following a decade or more of underwhelming performance. However, the sector has since bounced back strongly as earnings have been lifted by interest rate normalisation.

More recently, bank stocks have suffered some lacklustre returns in the risk-off environment caused by the Iran conflict, with some commentators drawing parallels to the sector’s poor performance during Russia’s invasion of Ukraine back in 2022. However, we feel the situation now is very different. Not only do Europe’s banks have zero direct exposure to Iran, but in this conflict they are supported by a positive interest rate environment and are in a stronger capital position. And despite long term outperformance, the relative valuation of the banks sector has remained attractive, at about a 40% discount to the market. It’s time to be cautious but not to capitulate, and we remain overweight given the improved fundamentals that continue to support Europe’s banks.

Pure style exposure in Europe

Allocating to a strategy that can maintain pure exposure to the value style in Europe through the market cycle can help enhance portfolio diversification and boost long-term risk-adjusted returns.