Fund Insight ODDO BHF Polaris Funds Range

Financial markets have started 2023 well, with European equities even slightly outperforming US stocks - a good reason to look at Europe in this Fund Insight.

Last year, European equity markets suffered from a lower risk premium compared to their US counterparts in light of the war in Ukraine. This was mainly due to the rapid increase in natural gas prices. Given the energy price shock, sentiment towards European equities was unusually negative. The easing of gas prices has since improved the outlook for Europe. But there are other reasons for investing more in European equities: European equities trade close to their longterm average valuation levels with a price-to-book ratio of 1.7, whereas equities in the US are valued much higher than their long-term average with a priceto-book ratio of 3,9. The euro should also appreciate against the USD, as interest rate differentials between the dollar area and the eurozone should narrow. However, in an environment of weak economic growth and high inflation, the focus should be on quality companies that should reliably deliver good results even in difficult times. In Europe, such companies can be found in numerous sectors and countries.

Insurance companies such as the French AXA and the German Allianz, for example, tend to be among the beneficiaries of rising interest rates, which is not yet reflected in valuations. In our analysis, there is also a lot to be said for European energy stocks such as Total Energies and Equinor with according to our analysis attractive valuations. Both stocks benefit from the ongoing shortages of gas and oil, but unlike their higher-valued US counterparts, they plan to invest a significant portion of the proceeds from the traditional energy business in renewable energies and reducing the carbon footprint. This also makes them good investments from an ESG perspective.

Capgemini's valuation metrics also speak in favor of the digitalization-focused consultancy compared to its US rival Accenture. There are some European industrial companies that benefit from megatrends such as automation and digitalization, where customer loyalty is particularly close and the willingness to switch is low because of the software solutions used. These include Siemens with technical solutions for automation and control, power supply, transport, and medical diagnostics. The French electrical engineering group Schneider Electric is benefiting from investments in the energy-efficient renovation and conversion of buildings. There is also growth potential from the development of charging infrastructure for ecars and the massive increase in investments in data centers. The company managed to expand its margins even in a difficult market environment by raising prices, controlling costs, and increasing productivity. Europe exports not only machinery and equipment, but also luxury goods such as wine, leather goods and watches. Here, LVMH is one of the world's leading companies with many strong brands in its portfolio. Especially the emerging middle and upper classes in Asia are willing to invest larger parts of their growing incomes in luxury goods as status symbols. This gives LVMH a high degree of pricing power. These European companies have long-term growth potential and therefore fit well into the quality-focused portfolios.

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Olivier Duquaine

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