Equities, Griffiths (L&G): “U.S. exceptionalism is not over, beware the European trap”

According to the strategist, global investors' overexposure to eurozone equities is a risk. But healthcare and AI remain opportunities. From Japan to the UK, here’s where to focus on

by Giulio Zangrandi

Donald Trump’s presidency prompted global investors to significantly increase their allocation to European equities, attracted by particularly low valuations and a China focused on stimulating domestic consumption. This shift led many observers to declare the end of American exceptionalism, after decades of Wall Street dominance over other financial markets. However, someone believe that overexposure to eurozone equities is not only a temporary phenomenon but could also become a trap if maintained for too long. Among those who share this view is Robert Griffiths, Global Equity Strategist at L&G, who argues that European companies will not be able to deliver earnings that justify their current valuations. FocusRisparmio interviewed the expert to explore his perspective.

In your opinion, what are the equity sectors that could be trickier for investors in terms of generated earnings? And on which ones does it make sense to continue to focus?

This year, investors have maintained their enthusiasm for quite a narrow group of sectors in Europe, in particular banks, defense stocks and construction. Banks are an interesting debate: economic slowdown tends to be very challenging for the earnings of banks as loans turn bad and rates are cut, but they remain the best performing sector this year (up 22%). As we move into a rate-cutting cycle, can this enthusiasm persist? For defense and construction, a belief in substantial German fiscal spending is critical. This week’s failed first vote to confirm Friedrich Merz as Chancellor highlighted that coalition politics, particularly concerning such historically significant policy shifts, may not be as easy as investors hoped. Some of the cheaper, more defensive areas of the market – such as healthcare or telecoms – might provide a better hiding place given the rally we have now seen across the broader market.

Does the “Trump incognita” affect this evaluation? If so, how?

I assume this question refers to the uncertainty injected into investing by the new US administration. This uncertainty has seen investors crowd into areas they consider somehow protected from President Trump’s policy agenda – such as more domestic sectors in Europe or those exposed to European self-help – pushing up their respective valuations. That’s understandable, but inevitably, any change in the President’s policy tone could see the idea of a ‘safe haven’ change quickly.  

Do you think the gap between US and European indexes will become wide again, as it was in the latest decades?

There is currently much enthusiasm for non-US assets. But as we mentioned in the blog, very strong earnings delivery, not just a valuation gap, really drove US outperformance in the last decade or so. And even in the current earnings season, US tech companies have beaten expectations significantly and maintained their significant capex commitments. European earnings, on the other hand, have been downgraded as the euro has strengthened and end demand has weakened for key companies in the luxury and semiconductor industries, for example. To really back non-US assets from here, one has to subscribe to the view that AI is simply hype, and not a revolution. However, there are a growing number of real world examples of the significant impact AI can have on productivity and profits that suggest such a conclusion won’t stand the test of time.

Excluding Europe, what are the geographic areas that can be appealing for investors who are wary due to US market volatility?

The UK market is cheaper than Europe, has shown signs of rising M&A activity – with foreign investors taking advantage of that cheap valuation to buy UK companies – and offers a degree of defensiveness. It has delivered some outperformance of Europe in the last month or so, and probably therefore deserves more attention. The same applies to Japan: significant buyback activity has helped to drive rising EPS estimates, even as those in Europe has got somewhat stuck. Plus, there are now more signs of corporate activity, such as Toyota Industries – the subsidiary of Toyota – potentially being taken private. When combined with a government which seems keen to make a deal with the US, it seems a market which deserves more investor focus.

What’s your strategy to navigate through this transition period?

We are trying to avoid sectors which are explicitly tariff-related, because we do not believe we have any particular edge or insight on this issue. We instead look for situations where we see ignored of cheap assets, where tariffs are not the main discussion. That has left us with a position in Japan relative to Europe as both face trade challenges – but with Japan starting from a position of less investor enthusiasm; healthcare, a good quality European sector which is trading very cheaply by its own history; and ongoing engagement with AI, an area which has somewhat fallen out of fashion in recent months.