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A new dawn for Europe?



Set against an environment of inflation pressures and pandemic recovery, Europe can offer investors attractive investment opportunities.




The Russia-Ukraine war has impacted the outlook for the European economy in 2022


NATO countries and European leaders have ruled out direct military confrontation due to the risk of escalation between nuclear powers, but the economic consequences of the war will be felt throughout the region.

Eurozone growth is expected to stagnate this year amid high inflation pressure - particularly for energy and food – weighing on both demand and production. At the same time, we should see the ECB remove extraordinary policy measures to curb inflation.

Over the long run, central to the European agenda will be the need to replace its oil and gas imports from Russia and accelerate its energy transition towards renewables, without causing further inflationary pressures.

Additionally, supply-chain bottlenecks inherited from the Covid-19 crisis should come under heightened scrutiny and Europe may look for re-shoring and strategic independence.

In the end, this may lead to a stronger and unified Europe, potentially looking at the prospect of a single defence system.

We recommend a highly selective approach in bonds and equities with a focus on inflation resilience.

 

Key investment themes to look out for


Tactically reduce risk, enhance hedges:
Tactically reduce risk, enhance hedges:
  • Keep well balanced portfolios, with an overall cautious risk allocation, but not structural risk off.
     
  • Increase hedges, through gold and equity/credit protection.
     
  • High flexibility and limited exposure to direction market movement through absolute return strategies.
Stay cautious. To navigate uncertainty and inflation, investors should focus on high-quality value:
Stay cautious. To navigate uncertainty and inflation, investors should focus on high-quality value:
  • Near-term caution in Europe due to lower economic and earnings visibility from the Ukraine crisis.
     
  • Value rotation may pause, but should continue in the mid-term. Play with a quality tilt, favouring companies with strong pricing power, ability to maintain earnings growth and preserve margins.
Overall short on duration, cautious on credit:
Overall short on duration, cautious on credit:
  • We are defensive on duration, but flexible across the curves: tug of war between rising inflation, upward pressure on yields, and geopolitical tensions.
     
  • Vigilant and more selective in credit: rising liquidity risks and inflation, but strong corporate fundamentals and low defaults.

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