Renewed Attention on European Equities Amidst Recovery

Transcript

Host: Manda, let’s start with the current environment in Europe, with the pandemic still dominating headlines, as it is across most of the globe. How do you view the region and the potential recovery ahead?

Mandana [Manda] Hormozi: As equity investors, we're always forward-looking. And so, you know, we see what the decline in COVID cases had done for the US, and Europe, while it was somewhat late in its vaccination program, it's caught up quite a bit, and now it's on par with the US. The economic opening, however, is still lagging. And so, what we expect is that the economic growth we've seen in the US is going to come to Europe as well. And so, being equity investors, looking forward, we think that some of that growth is still to come. We’re expecting good growth out of Europe this year, next year. We're going to have the European Recovery Fund, sort of, at the end of this year, kicking in and going through to 2023. So, there's nice follow through there, too.

Host: Plenty of reasons to expect strong economic growth in Europe, but Katrina, some investors may have doubts, just because of recent history.

Katrina Dudley: I think in Europe, what we've seen is a situation where, if we look back in the past, we've had so many obstacles to growth. We've had the Greece crisis, we've had the Italian crisis, we'd have separatists in Spain. And what we actually see is a nice, quiet environment going forth in Europe. And that makes us very confident on the ability for Europe to grow. Valuations are attractive, which is something that's encouraging. And then finally, if we add into that, the lack of the negative news, as I said, as well as some really unique things in Europe, which we think are very much designed to drive economic growth, going forward, coming from the European Recovery Fund, investments into environmental initiatives and everything. So, we're very optimistic about the outlook for European equities.

Host: You both briefly touched on the European Recovery Fund. Manda, how do view it in the scope of Europe, as a region, really coming together?

Manda Hormozi: The European Recovery Fund is a big step forward in the unification of Europe, we feel, or at least solidifying its unification. In addition to that, what we've seen is in the most recent regional elections is that the populist parties have not done well. We have Mario Draghi who's become the leader in Italy, and so, the risk of an Italian exit, like a Brexit, has really, sort of, subsided. In Germany's upcoming elections, we expect the coalition leader today, the CDU/CSU, to continue to lead a coalition government, and the populist AFD really did quite poorly in their regional elections most recently this past spring. So, the decline in populism, shall we say, and the European Recovery Fund are both great initiatives in terms the cohesion of Europe as we see it.

Host: Katrina, anything to add on the political environment?

Katrina Dudley: I think it is a positive for the region to have Draghi in charge of Italy. It's giving it a much more stable and good trajectory going forward. We're also looking at regions like Greece, where you've got a pro-business government in place. So, as we’re looking at the distribution of the EU Recovery Fund, one of the risks in Europe in the past, has been monies that come from any type of central government tend to get dispersed out as handouts. This time, we're really optimistic that those monies are going to be deployed into economically, value-added activities, which I think is very positive for the region, but it's something that's different going forward.

Host: And of course, Manda, Europe also may be at the forefront of economic and investment opportunities related to Environment, Social and Governance initiatives.

Manda Hormozi: You know, there's a big focus globally on ESG and Europe is a leader in certainly environmental sciences. And so, one of the lagging factors in Europe in the past has been technology and green technologies is an area where Europe is a leader. And so, we think that as more governments spend fiscal dollars on green initiatives, Europe’s technology companies are going to benefit from that.

Host: A lot of reasons for optimism, but there are risks. Katrina, what risks in Europe are top of mind for you?

Katrina Dudley: One of the risks we're tracking is what we're tracking globally, which is the Delta variant and whether or not that will slow reopening. But I really think that what we're seeing is kind of a “masks on and carry on.” So, everyone is actually looking to move forward with just slightly new rules of social engagement. But the reason we need to be very focused, not just on Europe and the Delta variant, but the global Delta variant, is Europe is an export economy. So, we need to make sure that there are markets for those products, and that they're as healthy as we’re seeing some of the optimistic trends in Europe. We’ve been very cognizant of the fact that the decline in populist sentiment has been a big driver for our optimistic view on Europe. So, any type of revival of populism in the region, we think could potentially derail, somewhat, the recovery. And then finally, we do have the European Recovery Fund, and we're looking for that to be a big driver of economic growth going forward. But if there's any hiccups, any delays or any building of, you know, green bridges to nowhere, that would be another risk in the region.

Manda Hormozi: The only thing I would add to that is, in Europe, we've been looking forward to a pickup in inflation for about a decade now. But, as with, again, everywhere in the world, the resurgence of inflation, how that's going to impact monetary policy, how that's going to impact the euro, as Katrina mentioned, you know, Europe is an export-led economy, so we're keeping an eye on inflation. We'd certainly like it to expand a lot more than it has in the past decade, but, you know, keep a band there. So, we're keeping an eye on inflation.

Host: Certainly, there are a lot of unknowns and disruption, as a result of the pandemic, but that also can create environments for change and opportunity. Katrina, there’s been a lot of talk of value strategies, perhaps, finally benefitting. What’s your view on that and your investment strategy?

Katrina Dudley: We've continued value-based catalyst driven. So, when we're looking at equities, we're looking forward. We're looking at cash flow trajectories, we’re modeling various outcomes, and we're looking to buy, you know, companies, which we see growth in that cashflow streams that we can acquire at a very attractive valuation, and that we can monitor the catalysts to achieve that valuation. We think that growth brings with it a lot of opportunities, and that is a great market for us as value investors, and in terms of Europe, if you look at the makeup of the economy, it does have a lot of sectors with value characteristics, probably more than you see in the United States. We're revisiting the financial sector once again and we think that some of the banks are gradually coming out of this in better shape from a cost point of view and with a stronger balance sheet, which is good. And then finally, we've been finding some great opportunities in the consumer discretionary space, as well as technology. And we've found a couple of areas where, you know, COVID and the pandemic has resulted in cheap valuations, and we've been able to take advantage of that.

Manda Hormozi: I just want to underwrite what Katrina just said, that seeing the improvement in underlying growth in Europe, just expands the opportunity set for us, because there are more companies that needed, sort of, a jumpstart and seeing that there facilitates that jumpstart. And, you know, there are good companies, there are terrific companies in Europe, both export-led, and now we can also look a little bit at companies that are domestic only as well, or sell predominantly within the European region, now that we're seeing some underlying growth. So, I think there are a lot of opportunities in Europe right now.

Host: Manda Hormozi and Katrina Dudley, Portfolio Managers from Franklin Mutual Series, thank you for joining us.

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