Europe Insights
Key Highlights:
- The EU has launched several region-wide initiatives to stimulate growth, improve synergies and is considering measures to drive efficient capital allocation to priority projects
- High-dividend stocks in Europe are gaining attention as yields in the top quintile exceed 7 per cent and the valuation gap with growth stocks may be set to narrow
- Differing macroeconomic conditions have widened credit spreads between European and US corporates, which - given recent forecasts - may persist
Europe’s accelerating transformation
Europe has struggled to match the economic competitiveness seen in the US for over three decades. A series of reports suggest that Europe, now, requires an annual investment of approximately 5 per cent of EU GDP to close this gap. Thus, Europe has been accelerating its transformation through several region-wide initiatives. Some of these aim to tackle challenges revealed during the pandemic and energy crisis by improving energy resilience, transport infrastructure, and digital security. Additionally, the creation of a Capital Markets Union (CMU) is expected to streamline funding access for businesses, particularly SMEs, while the proposed Savings and Investment Union could facilitate capital allocation to priority projects, promoting a more integrated and competitive European economy.
The return of high-dividend stocks?
High-dividend stocks in Europe have begun to gain traction as low interest rates and excess liquidity have shifted investors’ focus The top quintile of high-dividend stocks is offering yields of around 7 per cent, making these stocks worth another look. Historically, high-yield stocks have underperformed their growth counterparts, but as valuation multiples normalise, they may deliver both stable income and capital appreciation. Furthermore, sectors with high dividend yields have demonstrated strong growth, making them appealing despite previous trends favouring growth stocks.
Spread differential between US and euro credit
Historically, euro credit spreads-both investment grade and high yield-were narrower than or similar to those in the US. However, since the economic disruptions caused by the Covid-19 pandemic in 2020, euro credit spreads have widened compared with their American counterparts. While these two markets are structurally different, it seems that this spread differential is primarily driven by contrasting macroeconomic conditions. With forecasts indicating further divergence in growth between the two regions, this spread differential may persist for now, despite the euro credit market exhibiting better credit quality and lower default rates.