By John Surplice, Head of European Equities at Invesco.
After a decade of falling bond yields, 2021 has, at the very least, made investors sit up and question whether this can carry on indefinitely. Large sums of fiscal stimulus in combination with supportive monetary policy is a very different policy mix to the one in place since the Global Financial Crisis (GFC).
Some investors may believe it’s easy to write this off as a temporary phenomenon caused by the health crisis, however, we see increasing evidence that this new regime is likely to remain for some time to come. If our thesis is correct, the implication for European equities, and in particular what types of assets to own, are very significant.
Looking forward to 2022, we need to assess 2021:
Earnings recovery: Going into 2021, we were confident the earnings recovery would be better than many believed at the time and that this would be critical for market direction. This has proven to be the case, with the European index rising the best part of 20% supported by the very strong economic recovery so far.
Pricing power has returned to cyclicals. Given the lack of capital investment over the last decade or so, we expected supply constraints to become more evident and support higher prices, particularly in early cyclical areas. Various commodities, including oil for example, have duly benefitted.
Policy has shifted in favour or fiscal. In our view, 2020 drew a line in the sand in terms of the policy mix. We expected a shift to fiscal, and that has largely happened, led by the EU and US. In Europe, the disbursement of EU ‘recovery’ funds has only just begun and can be much more meaningful in 2022.
Value to outperform growth. After a very challenging 2020, value has done much better this year but has still struggled versus growth. But it’s actually more nuanced than that, with cyclical value doing well due to the economic recovery, whilst defensive value, such as healthcare, has lagged.
Utilities to outperform. Given the seismic shift in favour of the net zero agenda and compelling valuation, we thought that utilities were well set for 2021. Unfortunately, inflationary concerns have made investors more cautious about future returns, impacting share prices.