Controllables: Capitalize on the Potential Opportunity among European Equity

Overview:

In our latest newsletter, we discussed the compelling case of European equities. Here are the key points from that discussion:

1. Attractive Valuations: European equities are currently trading at historic lows relative to their US counterparts. The MSCI Europe index is trading at a significant discount compared to the S&P 500, offering potential for higher returns as valuations normalize.

2. Improving Corporate Fundamentals: Despite macroeconomic challenges, European companies are showing strong fundamentals with improved earnings and lower reliance on domestic economies. This resilience is a positive indicator for long-term growth.

3. Favorable Economic Conditions: Falling inflation and lower interest rates are expected to boost corporate capital expenditure and consumer confidence, supporting a cyclical upswing in European equity markets.

4. Europe's Global Trade Dominance Surpassing the US

   1. Trade Volume Growth: From 2000 to 2024, the European Union (EU) has a higher compound annual growth rate (CAGR) of 4.8% compared to the United States's 4.1%, which highlights the EU's stronger trade expansion. The EU's total goods trade expanded from $1.77 trillion to $5.43 trillion, while the US saw an increase from $2.04 trillion to $5.38 trillion.

   2. Trade Balance:

      1. The EU has maintained a trade surplus, exporting $2.8 trillion worth of goods in 2024, which is 34% more than the US's $2.1 trillion.

      2. In contrast, the US has a significant trade deficit, importing $3.3 trillion worth of goods, 25% more than the EU's $2.6 trillion. This dynamic between surplus versus deficit underscores the EU's stronger trade position.

   3. Strategic Trade Partnerships:

      1. The EU has strengthened its trade relationships with key regions, including Africa and Asia. By 2024, the EU became the primary trade partner for almost the entire African continent and overtook the US as China's main trade partner.

      2. The image below shows Europe’s increasing dominance as the globe’s trading partner.

Europe’s Increasing dominance as the globe’s trading partner

Investment Opportunity:

To capitalize on the emerging opportunity in Europe, we researched the market to find an investment to express our views. We believe identified security is an excellent investment to take advantage of the current valuation of European equities. Here’s why:

• Exposure to European Markets: this investment provides significant exposure to European equities, allowing investors to benefit from the growth potential and stability of companies in the region.

• High Dividend Yield: Investors outside the U.S., in general, place a greater emphasis on the “return OF capital” rather than the “return ON capital”. This security is comprised of high dividend yield investments, ensuring a steady income stream for investors. This is particularly advantageous in the current economic climate, where reliable income sources are valuable.

• Diversified Portfolio: The portfolio is diversified across various sectors and global regions (outside of Europe), which mitigates risk and provides stability. This diversification is crucial for navigating the uncertainties in the European market and limits the downside, if the identified opportunity doesn’t manifest as expected.

Conclusion:

Given the attractive valuations, improving corporate fundamentals, and favorable economic conditions in Europe, we believe we have identified a strong investment option. Its focus on high dividend yield and diversified holdings makes it an ideal choice for capitalizing on the opportunities in European equities.

Please feel free to reach out if you have any questions or need further information.