Income and growth without compromise with a European heart
May 2024
This is a marketing communication
The market backdrop for Europe continues to improve, despite investor attention remaining on the US and its “Magnificent Seven”. With discounts against the US at near-record levels, is now the time to invest in Europe? In this article, portfolio managers of JPMorgan European Growth & Income plc, Alexander Fitzalan Howard and Timothy Lewis, reveal the reasons they believe Europe presents an investment opportunity not to be missed.
While the US market’s robust performance has dominated headlines over the past six months or so, driven by a handful of tech mega stocks, canny long-term investors have had an eye to the strong recovery taking place in European markets.
What makes the current situation particularly interesting is the fact that although European stocks have performed so competitively, they remain deeply out of favour, sitting at near-record discounts to their US counterparts.
Europe’s Magnificent Seven: Tech and Beyond
“However, investors do finally seem to have realised that there is a world beyond the US’s Magnificent Seven tech-dominated leaders,” observes JEGI co-manager Alexander Fitzalan Howard.
He makes the important point that the constituents of European markets have changed dramatically over the past couple of decades. The region’s largest businesses are no longer drawn from worthy but dull sectors such as telecoms and energy, but from more dynamic, forward-focused industries including technology, healthcare and luxury brands.
Indeed, over the four years since the start of Covid in March 2020, Europe’s own Magnificent Seven leading companies have soundly beaten their US peers, producing total cumulative returns of a meaty 193% against the US’s 168%¹.
Fitzalan Howard argues that while many investors are keen for a piece of cutting-edge tech action, they have other options beyond the big US names. “If you want exposure to AI, you don’t have to buy Nvidia like everybody else,” he says.
“Why not consider ASML, which makes the tools needed to make the advanced chips, or Schneider Electric, which does the power management, crucial for AI data centres?” Europe provides rich pickings for investors looking for high-quality, growth-oriented, profitable companies - and unlike the US, they are still very attractively priced.
An improving macro outlook for Europe
For the JEGI managers, there are several respects in which Europe is well-placed in macroeconomic terms for a powerful bounce-back in due course.
First, says Fitzalan Howard, Eurozone inflation has been falling steadily in recent months and now stands at a very manageable 2.4%². In contrast, US inflation is proving stickier than anticipated, and the US Federal Reserve is not now expected to cut interest rates before late 2024.
“It therefore looks as though the ECB will cut rates first, which should be bullish for European equities,” he adds.
At the same time, the outlook for growth in the Eurozone is improving. On the consumer front, real wages growth has turned positive, driving an upturn in consumer confidence.
Nonetheless - and in contrast to the US, where savings levels have been falling for the past three years – people in Europe are still adding to their savings. “That means there’ll be plenty of firepower when sentiment improves.”
As far as manufacturing is concerned, the inventory correction that took place in the aftermath of the pandemic has run its course, and businesses are once again seeing growth in new orders. The Eurozone Purchasing Managers Index (PMI) is climbing once again as confidence picks up, and is predicted to “go above 50 in the summer”.
This augurs well for broader business performance too. “Historically, where the PMIs go, earnings revisions tend to follow - so the outlook for European earnings is starting to get better,” Fitzalan Howard explains.
Finally, despite the improving climate, European markets are sitting at extreme discounts to the US. The MSCI Europe index is trading at around 35% below the MSCI US, compared with a long-term average of around -15%³, with huge discounts in evidence across the range of investment indicators, from price-to-earnings and price-to-book ratios to dividend yield.
“As the outlook brightens, investors are likely to recognise the extraordinary good value available here,” comments Fitzalan Howard. Falling inflation, rate cuts and earnings pick-ups will also help to revive deeply unloved parts of the market, with the likes of cyclicals, banks and small cap businesses all feeling the benefit, he adds.
JEGI: Disciplined stock selection reaps rewards
For investors keen to take advantage of the current wealth of opportunity among European stocks, JEGI provides a robust route into this rich but under-appreciated market.
Co-manager Timothy Lewis points to the combination of rigorous quantitative research and deep, stock-specific fundamental analysis that goes into the building and maintenance of JEGI’s portfolio – a reflection of the breadth of JPMorgan’s resources.
That approach has self-evidently paid off. The Trust has consistently outperformed the benchmark, MSCI Europe ex UK index, producing strong absolute returns while limiting volatility – and has achieved this over short and long-term time periods, in both growth and value-dominated market environments, and when markets are falling as well as when they’re rising⁴.
The aim, says Lewis, is to keep JEGI’s portfolio inherently well-diversified, but with a focus firmly on “long-term global structural growth trends where European companies are well-placed to benefit”.
These themes include health and wellbeing, with holdings such as pioneering weight-loss drug manufacturer Novo Nordisk and L’Oreal, a leader in skincare products with pharmaceutical ingredients; the transition to a low-carbon world, through the likes of electric cable manufacturer Prysmian; and interest rate normalisation, via bank stocks such as the highly profitable Unicredit.
As the macro backdrop improves, the wealth of well-run companies with positive momentum at historically low prices undoubtedly makes this an exciting time for the JEGI team – and an outstanding opportunity for investors.
Learn more about JPMorgan European Growth & Income plc
1 JPMorgan Asset Management, Bloomberg. Data as of February 29, 2024. Cumulative total returns in USD rebased to 100 on March 2, 2020. European Magnificent 7 represents the market cap-weighted basket of Novo Nordisk, Schneider Electric, Safran, LVMH, Hermès, Ferrari and ASML shares. US Magnificent 7 represents a market-cap weighted basket of Alphabet, Amazon, Apple, MetaPlatforms, Microsoft, Nvidia and Tesla shares. Past performance and forecasts are not a reliable indicator of current or future results.
2 Eurostat, LSEG Datastream, J.P. Morgan Asset Management. Core inflation is defined as headline inflationless energy, food, alcohol and tobacco. Guide to the Markets-Europe. Data as of 31 March 2024
3 Factset; MSCI Europe vs MSCI US from 01 December 1997 to 29 March 2024 on a 12 monthforward P/E ratio and Bloomberg as of 31 March 2024
4 J.P. Morgan Asset Management, Morningstar. Data to 31 December 2023. Performance calculated on NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, debt at par, in GBP. Returns areprovisional and subject to change. On 26/03/13, the benchmark for the Trust was changed from FTSE All World Developed Europe (ex UK) Index to MSCI Europe ex UK Index. Excess return calculated geometrically. Effective 4th February 2022, JPMorgan European Investment Trust (Growth Shares, JETG) and JPMorgan European Investment Trust (Income Shares, JETI) has unified to create a single share class, JPMorgan European Growth & Income plc following the existing strategy of JETG portfolio. Shows the % of months that the fund outperforms the MSCI Europe ex UK Index in different market conditions over the last 10 years in GBP. ‘Value markets’ is when MSCI Europe Value Index outperforms MSCI Europe Growth Index and vice versa.
Disclosures
Past performance is not a reliable indicator of current and future results.
Source: J.P. Morgan Asset Management/Morningstar. Net asset value performance (NAV) data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.
NAV is the cum income NAV with debt at fair value, diluted for treasury and/or subscription shares if applicable, with any income reinvested. Share price performance figures are calculated on a mid market basis in GBP with income reinvested on the ex-dividend date. The performance of the company's portfolio, or NAV performance, is not the same as share price performance and shareholders may not realise returns which are the same as NAV performance.
Benchmark Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved, in or related to compiling, computing, or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.
Comparison of the Company's performance is made with the benchmark. The benchmark is a recognised index of stocks which should not be taken as wholly representative of the Company's investment universe. The Company's investment strategy does not follow or track this index and therefore there may be a degree of divergence between its performance and that of the Company.
On 26/03/13 the benchmark for the Trust was changed from FTSE All World Developed Europe (ex UK) Index to MSCI Europe ex UK Index.
Summary Risk Indicator:
The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.
Investment objective:
Aims to provide capital growth and a rising share price over the longer term from Continental European investments by taking carefully controlled risks through an investment method that is clearly communicated to shareholders. Currency exposure is predominantly hedged back towards the benchmark. The Company has the ability to use borrowing to gear the portfolio within the range of 10% net cash to 20% geared in normal market conditions.
Risk Profile:
Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
This Company may use derivatives for investment purposes or for efficient portfolio management.
External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
This Company may also invest in smaller companies which may increase its risk profile.
The share price may trade at a discount to the Net Asset Value of the Company.
This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
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