Good Value Briefing | The upside in Europe and the upshot on China

We love a Euro-trip and no doubt so do you. Recently there have been some positive developments in the region.

From today Spain is welcoming all vaccinated tourists. On Wednesday, restaurants and bars will recommence indoor service in France and Belgium. Also, over the past few weeks, the likes of the UK, Greece and Germany have made significant announcements regarding easing restrictions. Even in Ireland, where some of the toughest lockdowns in the EU were imposed, restrictions are slowly being lifted.

Holiday plans aside, Europe’s ‘awakening’ provides some significant points of interest for global investors.

Uncovering more cyclical upside

In the developed world, the US has led the post-COVID economic recovery because they’ve led the vaccine rollout. This is an important factor when considering the performance of equities so far this year.

From here on there will be beneficiaries in the US from the extraordinary levels of stimulus – but investors need to be selective as the rest of the world catches up.

Our internal vaccine tracking shows Europe catching up to the US in terms of vaccination rates – the US is struggling to get past 50%, the UK is at 57%, while Germany and other major European countries aren’t far behind. This is why we think Europe is currently a hot bed for cyclical upside as the vaccine gap closes.

We are also cognisant of Europe’s massive exposure to tourism. It accounts for around 10% of GDP across the continent and more than 15% of employment in Southern Europe. This compares to just 2% of GDP in the US. Border re-openings will disproportionately benefit European economies.

When it comes to European equities, we think there is strong upside for high quality businesses in the economically sensitive parts of the market including financials, autos, travel and retail. We have been positioning Antipodes’ portfolios accordingly.

As pragmatic value investors we take opportunities to invest around economic and business cycles, along with exciting opportunities to invest around much longer-term super cycles.

Unflappable China

Speaking of longer-term cycles, our long-term conviction in Chinese domestic consumption remains undeterred, despite concerns of a ‘slowing’ economy.

The Chinese economy has now more than normalised – real GDP is already 2% higher than 2019 levels and is forecast to be 12% higher by 2021. A stark contrast to most other major economies.

China’s manufacturing, retail and auto sales have all exceeded 2019 and 2020 levels. Property sales, after having had a stellar recovery from mid-2020 are starting to slow, but from a high base.

Yes, China is tapping the brakes. You may read about China’s ‘contracting credit impulse’ in the press. What commentators are saying is that less credit is being used to create additional GDP.

Growth in total social financing (a broad measure of credit and liquidity which includes off-balance sheet financing) has slowed in recent months to around 12% year-on-year, having peaked at closer to mid-teens growth in the later stages of 2020.

While this may be a point of concern for some investors, we focus on the bigger picture.

Slowing credit growth – or tightening – is a sensible policy response to an economy that is humming along. It avoids the perils of over overheating. It also means if activity does slow in China as we enter 2022, policy makers have the scope to ‘loosen’ or stimulate again. The same cannot be said of the US.

China’s current economic policies don’t impact the shift in demographics that will unfold over the next decade. By 2030 China is predicted to have 100m households with a developed world-style income. A new breed of high-powered consumer is emerging and Antipodes’ portfolios are well-positioned to benefit.

In this video, Antipodes Asia Fund PM, Sunny Bangia, speaks about the key themes Antipodes is focussing on when investing in China and the broader Asia region.

A stock in focus | ING Groep

ING Groep (AMS: INGA) is in a great position to benefit from a cyclical catch up in economic activity in Europe.

Here we have an incredibly well-capitalised retail bank with more than half of its loan book in Northern Europe and around two-thirds in residential mortgages. It isn’t under threat from savvy fintechs, in fact ING was arguably the original disrupter given its predominantly online business model.

As regulators lift restrictions on distributions (a precautionary measure taken by regulators globally in 2020) ING has scope to lift its payout ratio given considerable excess capital. This can act as an additional catalyst for re-rating. We see the company valued at 10x earnings with sustainable 8.5% dividend yield. It is a top 10 position in our global strategies.

Antipodes Partners Limited (ABN 29 602 042 035, AFSL 481 580) (‘Antipodes’) is the investment manager of Antipodes Global Investment Company Limited ABN 38 612 843 517 (‘APL’). Any opinions reflect the judgment and assumptions of Antipodes and its representatives on the basis of information at the date of publication and may later change without notice. Disclosure contained in this communication is for general information only and has been prepared without taking account of any person’s objectives, financial situation or needs. Persons considering action on the basis of information in this communication are to contact their financial adviser for individual advice in the light of their particular circumstances.
7 June 2021