European equities are currently presenting attractive valuation opportunities compared to other regional equity and fixed-interest markets. Invesco believes that several factors have contributed to this attractive valuation, including concerns about the global economic cycle, rising energy costs, broader inflationary pressures, and the ongoing Ukraine conflict. 

Oliver Collin, Co-Head of European Equities at Invesco, contends that despite minor technical recession indicators in 2023, European corporations have maintained strong balance sheets, characterised by low or even zero levels of debt. 

“This is key given weak balance sheets in slowdowns can lead to distressed share issuance. This is what happened in the banking sector post-Global Financial Crisis (GFC), for example. If balance sheets are, as today, strong, this risk is low,” remarks Collin. 

Subsequently, the asset manager suggests that the prospect of “higher for longer” interest rates makes a compelling case for long-term investment in the banking sector and other capital-intensive industries. 

On risks in European equities, Invesco suggests that they are primarily associated with a potential recession and the types of economic landing, whether “hard” or “soft,” along with the trajectory of interest rates. 

Meanwhile, Collin says the main investment opportunities in Europe are multifaceted, with a focus on fundamental stock picking and quality transition. Sectors such as non-consumer-facing industries, manufacturing, capital-intensive companies, large-cap pharmaceuticals, and energy offer appealing prospects, he adds. 

“Energy is also extremely interesting in the current environment with oil prices likely to be supported in the near-term by a shortage of US supply,” opines Invesco. 

Additionally, the asset manager suggests that ESG considerations are significant in Europe, with increasing regulations supporting the drive towards net zero emissions and encouraging investment in ESG initiatives. 

“In the longer-term in Europe, we believe concerns over the security of energy supply plus the nearshoring of manufacturing and industrials are going to result in significant investment,” says Invesco.  

“Linked to this is continued decarbonisation and regeneration as part of the EU’s drive to remain at the forefront of the net zero agenda, plus broad-based digitalisation to continue efficiency gains,” sums up the asset manager. 

Read the full insight here.