Investment Trust Insights

Don’t count European equities out

JEGI’s steady investment approach has generated strong annualised returns consistent outperformance through past European macroeconomic challenges and geopolitical uncertainty.

It’s been easy for investors to come up with reasons to be negative on European equities. Indeed, over the past 10 years, Europe has been impacted by many global macroeconomic headwinds—the pandemic, the war in Ukraine, rising inflation and interest rates—as well as more specific European challenges, including reducing its reliance on Russian gas, sluggish economic growth and rising populist movements shaking up the political landscape.

Despite these challenges, over the past 10 years, the NAV of the JPMorgan European Growth & Income plc (JEGI) has increased over 9% per annum—over a full percentage point above the benchmark’s annualised return over 10 years1.

Investors are negative, the data looks more positive

As the US economy and stock market continue to exceed expectations, many investors don’t have the same level of confidence in Europe’s economy or stock markets. Concerns about European macro has become the consensus view, even more so since the US election. 

However, a closer look at the data reveals early signs of recovery in Europe. While many industrial businesses remain weak, the European purchasing manufacturers’ index is improving and financial conditions across the eurozone are starting to ease from the tightest levels seen in the past 15 years. The European Central Bank (ECB) has started cutting interest rates, which are expected to normalize back down to 2%.

Importantly, the consumption is finally showing signs of picking up. The strong post-Covid consumer rebound in the US was more muted in Europe because of war in Ukraine, high energy prices and inflation. Consumer confidence and retail sales are now improving and positive wage growth should help sustain the trend. J.P. Morgan Asset Management’s consumer research analysts in the US note that the European consumer is an unexpected area of strength for some of their companies while JEGI’s portfolio managers are seeing signs of improving consumption in consumer-exposed companies in the portfolio.

Do European companies deserve a discount?

Investors often dismiss the persistent valuation discount of the European equity market to the US equity market as structural. The European equity indices have more cyclical and value-type companies that typically trade with lower valuations compared to the S&P 500, which benefits from the higher valuations of technology companies.

However, a closer look at European and global markets shows that the discount persists within sectors and for no discernable reason. Across every single sector, European stocks, on average, trade at wide discount to their global peers. Consider the following pairs of stocks with similar fundamentals, but where the European company trades significantly lower than a comparable global one on 12-month forward earnings: Rolx trades at 28x vs. Thomson Reuters (Canada) at 41x; Novo-Nordisk trades at 29x vs. Eli Lilly (US) at 44x and Michelin trades at 9.5x vs. Bridgestone (Japan) 10x2. Just closing these valuation gaps could support performance of European equities.

Key themes across the portfolio

JEGI’s investment team covers 1300 European companies across the market capitalisation spectrum and looks for businesses that have a combination of quality, value and momentum to construct a portfolio based on individual stock prospects. From this bottom-up stock selection process, four key themes emerge:

  • Spending on health and wellbeing is projected to continue increasing, benefiting a wide variety on JEGI’s companies including Danish pharmaceutical company Novo Nordisk, which manufactures the blockbuster diet drug Wegovy; Glanbia, an Irish dairy business; and Italy’s Essilor Luxotica, a high-end eyewear company that is fitting hearing aids into eyeglasses.
  • Transitioning to a low-carbon economy is underway in Europe and several portfolio holdings will play important roles. Italy-based Prysmian has a 34%–40% global market2 share of submarine high-voltage cables that are critical to helping the energy grid expand. The company recently made an accretive acquisition in the US and has revised earnings up. Two French companies, Schneider Electric, a global leader in digitising and automating energy management, and Spie2, an energy services company, provide additional exposure to the energy transition theme.
  • Interest rate normalisation is expected to continue in Europe. JEGI has high exposure to European banks, with a large position in Unicredit, a well-capitalised bank that pays a large dividend while also buying back shares. The portfolio’s holding in Nordea and ING Group are also well positioned to benefit in an environment where interest rates are around 2.0%–2.5%,3 the most profitable level for European banks.
  • Resilient consumers are expected to begin spending again. JEGI has exposure to travel-related companies, such as Irish budget airline Ryanair, and apparel manufacturers with global footprints, including Spain’s Inditex and Germany’s Adidas.

Consistent approach, consistent performance

JEGI’s portfolio managers use long-term stock selection and focus on portfolio construction to generate modest returns above the benchmark that can compound over time—and can help limit drawdowns in volatile markets. This time-tested investment approach has generated consistent outperformance across one, three, five and 10 years.

Sources :
1 
Past performance is not a reliable indicator for current and future results.
J.P. Morgan Asset Management.  Performance and AuM data as at 30 September 2024. Performance data using net asset value per share, cum income, with debt at par value in GBP. Geometric excess returns. Please note Benchmark Indices do not include fees or operating expenses and are not available for actual investment. Benchmark is the FTSE All-Share (ex FTSE 100, ex Investment Companies) Index.
2 J.P. Morgan Asset Management, Bloomberg. Data shown from 31 March 2023 to 30 April 2024.
3 Factset November 2024.

Summary Risk Indicator

 

The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment objective

Aims to provide capital growth and a rising share price over the longer term from Continental European investments by taking carefully controlled risks through an investment method that is clearly communicated to shareholders. Currency exposure is predominantly hedged back towards the benchmark. The Company has the ability to use borrowing to gear the portfolio within the range of 10% net cash to 20% geared in normal market conditions.

Key Risk 

Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.

Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.

This Company may use derivatives for investment purposes or for efficient portfolio management.

External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.

This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.

This Company may also invest in smaller companies which may increase its risk profile.

The share price may trade at a discount to the Net Asset Value of the Company.

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained free of charge in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 

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