Last winter, Europe faced challenges with its energy sector due to the Ukraine invasion, causing economic concerns. However, despite weak economic growth and other issues, financial markets continued to perform well.
Last winter, Europe faced challenges with its energy sector due to the Ukraine invasion, causing economic concerns. However, despite weak economic growth and other issues, financial markets continued to perform well.
Throughout the year, European companies and consumers struggled with high energy costs, inflation, and rising interest rates. Germany, a key player in the European economy, faced an industrial downturn. The Eurozone consumer also showed weakness, with retail sales falling more than expected.
Despite economic difficulties, the European Central Bank ECB maintained interest rates, and inflation figures fluctuated. Financial markets, surprisingly, remained resilient. The MSCI Europe ex UK index rose by 12.45% in the 12 months to 31 January, although slightly behind the MSCI World index*.
Some European companies, like Novo Nordisk and ASML, performed well despite the economic challenges. Novo Nordisk introduced new drugs, while ASML’s technology contributed to semiconductor advancements. Even in the luxury goods sector, some companies defied the overall consumer gloom.
Looking ahead, the economic outlook for Europe is uncertain, with little support from economic growth. Interest rate cuts may not happen as quickly as hoped. While European markets seem cheaper compared to the global index, they are not as affordable as the UK market. Let’s see where to invest in Europe.
Where to invest?
The economic situation may be challenging, but opportunities exist for active managers. One potential solution is to explore overlooked opportunities, particularly in small-cap companies. These companies have faced challenges, but there is real value waiting to be realised, especially if interest rates drop or the economy improves.
Alex Magni, manager on the WS Montanaro European Income fund, notes that European small caps underperformed large caps in 2023, creating an unusual situation. He emphasises that smaller companies are undervalued due to economic uncertainties.
