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Continental lift

05 July 2017

Stuart Mitchell believes a combination of improving growth, rising support for the EU, and positive business sentiment is buoying eurozone stocks.

Ever since May, the financial pages have bulged with stories of equity inflows to Europe1. Inflows to European equities struck an 18-month high in May, according to Morningstar2. The MSCI Europe, an index of 446 of the largest European stocks3, has risen by more than 15% this year4, far ahead of the FTSE 100 and even several percentage points up on the S&P 500. 

Equities have been no outlier. Consumer confidence in the single currency area struck a 16-year high in June. Meanwhile, between April and June the eurozone Markit Purchasing Managers’ Index, which measures business confidence, registered its strongest quarter since 20115. In June investor confidence, according to the monthly sentix survey, reached its highest level since the global financial crisis6

“In Europe, there has been both a dip in political worries and a rise in growth dynamics,” says Stuart Mitchell of S. W. Mitchell Capital. “Approval for Continental Europe has risen significantly since the Brexit and Trump votes.”

Nevertheless, although stock flows have followed, it would be easy to overstate them. As Mitchell points out, financial inflows to European markets in 2017 have amounted to just a fifth of the total that flowed out of the region in 2016. Despite the strong performance of European stocks in recent months, investors more broadly remain relatively cautious – despite all the headlines.

Yet significant changes appear to be underway, spurred in large part by the groundbreaking success of Emmanuel Macron in France’s presidential and legislative elections. His plans to reform the labour markets appeal to business, but he will need to find a way to succeed where many of his predecessors failed.

“France actually has one of the very lowest rates of union participation in the whole of Europe – just 8% of the workforce is unionised compared to 25% in the UK,” says Julian Johnston, investment analyst at S. W. Mitchell Capital. “But the unions have a grip over the French political process – the Socialist Party link to the unions was elevated into a symbol of virtue in the 1980s. As for the right-wing governments, they feared the return of the Socialists and so, at the first sign of opposition to their labour reforms, they back-pedalled.”

The difference now is that the Socialists hold just 45 of the lower house’s 577 seats, whereas Macron’s new party (and its allies) took 350 seats. As a result, the Socialists don’t represent the same threat anymore – neither, by extension, do the unions. There are other potential Macron tailwinds for business too.

“Macron wants to reduce corporation tax from 33% to 25%,” says Stuart Mitchell. “Plus there are new possibilities for the eurozone. The Macron–Merkel deal is that France reforms and Germany pays. There is the potential for France to become more competitive.”

Buying in

Mitchell found a number of investment opportunities before the improving outlook for the eurozone economy began to show up in the figures. One area that benefited was housebuilding and in March 2014 he acquired Saint-Gobain, a 352-year-old French producer of building materials that operates all over Europe, for both his mandates – the Continental European fund, and his 50% mandate within the Greater European fund.

“Housebuilding has picked up, most notably in Spain, France and Germany,” says Mitchell. “The renovations sector has been a bit weaker thus far. But Saint-Gobain has seen its sales figures jump.”

Another recent success for the fund is Maersk, the Danish container ship operator, which saw its share price drop due to a fall in shipping rates. Mitchell bought the company at the start of 2017 and has realised a gain of more than 10% since.

“Scrapping is picking up significantly – lots of cities won’t let in old containers,” says Mitchell. “This year there’s a 4% increase in container newbuilds, whereas next year [the orders book shows that] it’s flat. But trade is picking up, especially on the North–South [shipping] routes, so there should be an optimal point next year. We think the stock has some way to go yet.”

Indeed, much future growth remains to be priced in to European stocks, in Mitchell’s view. He points out that domestic housebuilders and banks in Continental Europe are currently trading at a 40% discount to the US.

“Cyclical companies in the US are now making pre-crisis margins, but European cyclicals are only making half their pre-crisis margins,” says Mitchell. “Two to three years of European growth would narrow the gap. Some are worried that the banks will struggle with pricing power, but inflation has a habit of coming back – and it’s likely it will pick up again. In many ways, the votes for Brexit and Trump were due to frustration over real wages, whereas real wage growth in Germany is at 3% and in France it is above 2%.”


The information contained above, does not constitute investment advice.  It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.  Full advice should be taken to evaluate risks, consequences and suitability of any prospective fund or investment.  Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

S. W. Mitchell Capital is a fund manager for St. James’s Place

1 For example:

Source: MSCI.  MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.  The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products.  This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.


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