Download Strong market support for European value stocks

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Strong market support for European
value stocks
Date: 7 July 2017 | Author: Nicolas Simar, Head of Equity Value Boutique at NN Investment Partners
Value stocks, especially financials, will be the major beneficiaries from the growing stress in bond markets and the
current positive macro-economic environment.
NN Investment Partners (NN IP) expects that investors in Europe will switch their appetite from bonds to value stocks,
which have a strong positive correlation with rising bond yields and are now seeing improving earnings. Banks have the
highest positive correlation of all cyclical sectors.1
The valuation gap between expensive and cheaply valued companies also remains at a very high level in Europe, thereby
providing a strong reason for investors to rotate into value stocks. Current valuation dispersion levels are close to those
at the peak of Eurozone crisis of July 2012, and are currently significantly above the long term average of the last twenty
years. For investors, this should offer enough margin to safely rotate into value stocks, also taking into account the
economic recovery of the Eurozone.
Investors have favoured bonds and their proxies in the first half of this year because of political risks and low inflation.
But recent comments from central bankers that the unprecedented era of monetary easing is set to end soon have
prompted outflows from this asset class. Political risk in the Eurozone has also declined significantly after the French and
Dutch elections, thereby removing a strong headwind for value stocks.
Stocks with predictable cash flows - also called ‘low volatility stocks’ - have behaved as bond proxies and have strongly
outperformed in recent years as interest rates fell. Many of these stocks can be found in sectors such as Food &
Beverage, Personal Care and Consumer Durables & Luxury. However, the combination of these excessive valuations and
the prospect of rising interest rates constitute a toxic cocktail for these sectors and therefore NN IP continues to
underweight them.
We believe that, as the outlook for the Eurozone economy brightens, cyclically-sensitive stocks will be a prime focus for
investors. Confidence in the euro area is strong, with both consumer and business sentiment indicators in June at their
highest levels for nearly ten years.2 Macro-economic data in Europe point to further economic expansion. Earnings
trends and the upside potential for equities are improving significantly, driven by sectors including Banks and
Commodities.
Hence NN IP retains a preference for dividend stocks geared to the economic recovery in Europe and is cautious on
expensive low volatility stocks, for which capital protection is at risk given interest rates are expected to rise in the
future.
1
Source: Thomson Reuters, Credit Suisse, June 2017
Source: Bloomberg, 29 June 2017
2
ENDS
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Disclaimer
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About NN Investment Partners
NN Investment Partners is the asset manager of NN Group N.V.,
a publicly traded company listed on Euronext Amsterdam. NN
Investment Partners is head-quartered in The Hague, The
Netherlands. NN Investment Partners in aggregate manages
approximately EUR 194 bln* (USD 208 bln*) in assets for
institutions and individual investors worldwide. NN Investment
Partners employs over 1,100 staff and is active in 15 countries
across Europe, U.S., Latin America, Asia and Middle East.
NN Investment Partners is part of NN Group N.V., a publicly
traded corporation.
* Figures as of 31 March 2017