Europe: Growth or not?

European growth equities have reaped the benefits of worldwide growth trends in the second quarter, particularly those amplified by artificial intelligence, showcasing a notable out-performance. They defied the odds of higher rates, alimented in June/July by apparent short covering on some of the most overvalued stocks in the segment.
By the close of the third quarter, a decline in manufacturing coupled with diminishing prospects in the European services sector rightly led to a re-assessment of Europe’s economic situation and growth names’ valuation in the region. 
In recent weeks, growth stocks have significantly lagged behind value stocks, with disappointment versus expectations being severely punished by the market.

Unprofitable stocks eroded much of the gains they achieved in the first half of the year, the Goldman Sachs Unprofitable Tech Index being now up 21.3% year-to-date, a stark decrease from its 55.6% upside at the end of July. 
This recent development has been a strong contributor to the Short book recovery of our Market-Neutral strategies. Both our European and Global strategies posted their strongest monthly return since 2021, up 4.7% and 3.6%, respectively, and are now close to flat year-to-date after suffering from the painful June/July short covering. 

A shared consequence of more elevated rates is the under-performance of Small Caps, which have consistently trailed this year regardless of their valuation. They are still experiencing their most significant relative downturn against Large Caps. For the first time since the Global Financial Crisis, European Small Cap stocks are now at par with Large Caps in terms of earnings yield valuation. This sets the stage for compelling investment opportunities within this segment in our European Long portfolios.

Emmanuel Hauptmann
Partner, CIO & Head of Systematic Equities
 

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