DAS INVESTMENT: Mr Morrison, following the US customs announcements in April, European equities rose sharply. However, the rally in the US has since regained momentum. How do you assess the situation?
Jeffrey Morrison: The US rally has continued after the tariff dispute, but american stocks in local currency have lagged behind Japan and the emerging markets. There is still a high degree of concentration: fast-growing technology companies associated with the AI boom are driving the indices. Some are seeing strong profit growth, while others are trading at high price-earnings ratios – their performance remains riskier.
In Europe, the stock markets have reacted positively to the ECB's cut cycle, changes in fiscal policy and possible deregulation initiatives. The market was driven more strongly by value momentum factors. This is often the case in recovery and upturn phases.
Is there a bubble looming on the US market?
Morrison: A high concentration of top stocks is more likely to be associated with the risk of a bubble than with a healthy market environment. When only one sector is driving the markets upwards, there is always the concern of an abrupt crash if something goes wrong in that particular sector. We prefer pronounced market depth as a sign of an intact market.
However, a concentrated market can certainly persist for a long time or even bridge the gap to a healthier market breadth. Investors who hold back run the risk of lagging behind the market.
US equities are considered highly valued, while European equities are considered cheap. Which key figures are decisive for you?
Morrison: Yes, based on a wealth of key figures – price-earnings ratio, price-sales ratio and others – the US is more expensive than Europe. However, valuation is not a helpful indicator for either short-term absolute or relative market performance.
A comparative perspective is more reliable: What are the relative prospects for the economy and earnings? US equities are trading at a premium for good reason – a more favourable regulatory environment, better corporate quality, better growth prospects. If Europe were to fare better thanks to more expansionary fiscal or monetary policy, the valuation gap could narrow.
Nevertheless, valuation metrics are an important factor in our bottom-up approach. We assess equities on the basis of valuation, momentum, quality and sentiment on a regional and sectoral basis. Metrics such as the price-earnings and price-cash flow ratios have proven effective in distinguishing between equities in similar market segments.
Which countries or sectors in Europe currently offer the most interesting opportunities?
Morrison: The latest OECD Composite Leading Indicator and other economic indicators suggest that the European economy is moving from the recovery to the expansion phases of the business cycle. Based on our historical analysis of sector performance through the economic cycles, we expect cyclical growth sectors such as consumer discretionary, industrials, technology and commodities to lead the markets in the near term.
What political or structural risks should investors consider with regard to European equities?
Morrison: Europe is currently redefining itself. The US is taking a tougher stance on trade and defence spending, while in the east, Europeans are confronted with an aggressive Russia . Several countries are struggling to stimulate their economies, which makes it more difficult for them to service their debts.
Economic concerns, fear of immigration and growing mistrust of elites are strengthening populist parties. The political unrest in Great Britain, France, Spain and Germany clearly demonstrates this.
Markets have so far rewarded supportive monetary policy and more expansionary fiscal policy. With the exception of the UK, Europe remains a more cyclical market than the US – which poses risks if economic and earnings prospects deteriorate.
How do interest rate policy, inflation and other macroeconomic trends affect your investment decisions?
Morrison: These factors play only a minor role in our individual decisions. However, we do look closely at the macroeconomic environment, as it has a significant influence on which research factors affect performance.
We have analysed factor performance across economic cycles historically: Cyclical factors such as price-to-sales and price-to-book ratios, as well as beta, perform best during recovery phases. In the upturn phase, earnings and price momentum as well as growth and valuation factors outperform. When central banks respond to higher inflation with interest rate hikes, earnings momentum and profitability factors such as ROE and ROIC lead the way. At the end of the cycle, during the recession, defensive factors such as dividend yield and low volatility perform best.
