Laggard European Markets: The Next Big Recovery Trade

As the global economy continues to recover from the COVID-19 pandemic, investors are looking for the next big opportunity. While the U.S. market has been the star performer in recent years, Europe may be the next big recovery trade. Despite the region's persistent productivity gap with the United States, Europe's laggard markets present an attractive investment opportunity for long-term investors.

The European Central Bank (ECB) has been implementing a range of measures to support the recovery of the European economy, including quantitative easing and forward guidance. The ECB's accommodative monetary policy stance has helped to lower borrowing costs and stimulate economic activity, contributing to the region's recovery. Additionally, the ECB's focus on core inflation has allowed for a more flexible approach to monetary policy, which has been beneficial for the European economy.

However, the ECB's focus on core inflation has also raised concerns about the potential for higher inflation in the future. The ECB has been criticized for not paying enough attention to the risks of higher inflation, which could lead to a loss of credibility and a potential tightening of monetary policy. This could have negative consequences for the European economy, as higher interest rates would increase borrowing costs and slow down economic growth.

Despite these challenges, Europe's laggard markets present an attractive investment opportunity for long-term investors. The region's structural challenges, such as low productivity and high unemployment, are well-known and have been persistent for decades. As a result, these markets are often undervalued and offer significant upside potential. Additionally, the European economy is expected to benefit from the recovery from the COVID-19 pandemic and the region's structural reforms, which should support a strong rebound in economic growth.

Investors looking for exposure to laggard European markets can consider a range of investment options, including equities, bonds, and real estate. European equities, particularly those in under-owned sectors like energy, can offer attractive valuations and significant upside potential. Investors should focus on companies with strong management teams and enduring business models, such as those in the MSCI Europe Energy Index. European government bonds, particularly those from countries with strong fiscal positions and low debt levels, can provide a stable source of income and capital preservation. Investors should consider bonds from countries like Germany, the Netherlands, and Austria. European real estate, particularly in prime locations like London and Paris, can offer attractive yields and capital appreciation. Investors should focus on high-quality properties with strong tenant demand and stable cash flows.

In conclusion, laggard European markets may be well-positioned for a strong recovery in the coming years, as the region's economy recovers from the COVID-19 pandemic and structural challenges. Investors looking for undervalued markets with significant upside potential should consider exposure to European equities, bonds, and real estate. However, investors should be mindful of the region's structural challenges and the potential for higher inflation in the future. By focusing on high-quality companies with strong management teams and enduring business models, investors can position themselves for a successful recovery trade in laggard European markets.