European equities: over to you, Christine

However history judges his successor, Christine Lagarde, the role is unequivocally more politicised than it was a decade ago. Such a backdrop can only intensify the perpetual narrative around European assets: tread softly, for here lies political risk. Of equal importance to shareholders is whether the ECB president is now guarantor of the continent’s economy, or a lobbyist of its politicians.

For investors reappraising their allocations to European equities, both roles come with potential benefits – and risks.

Lagarde, la gardienne?

If the first few weeks of the former International Monetary Fund’s chief’s tenure are a guide, then the year ahead could mark a major shift for both Europe’s political economy and the backdrop for investors. Already the Frenchwoman has ordered the first review of ECB monetary policy strategy in two decades, in a bid to address divisions within the central bank’s governing council. Increasingly, members are torn on the efficacy of monetary stimulus efforts and a deposit facility rate – that is, the interest or charge on overnight bank deposits in the euro system – of minus 0.5 per cent.

Having previously advocated for negative rates, few expect Ms Lagarde to abandon the ECB’s grand monetary policy experiment. While a rate rise could in theory force governments to beef up fiscal spending commitments, analysts at Saxo Bank consider the prospect sufficiently distant as to be considered an "outrageous prediction" for 2020.

Indeed, part of the ECB review is likely to involve more collaboration, as well as deflection. In his outgoing remarks, Mr Draghi acknowledged that Europe’s growth trajectory would require support from politicians prepared to reform spending rules and embark on fiscal stimulus. For her own part, Ms Lagarde has urged the governments of wealthier low-deficit eurozone nations such as Germany and the Netherlands to loosen the purse strings. “Central banks are not the only game in town,” she told the European Parliament in September. “I’m not a fairy,” she warned.

She may have the market’s backing. “If European governments are determined to generate growth, they need to spend less time obsessing about balancing the books and devote greater effort to the reform schedule,” argues Barclays’ senior investment strategist Henk Potts.

Au revoir, laissez faire

Although co-ordination is lacking, there are some early signs that the most budget-minded members are softening their tone. Germany has announced plans to invest in a new climate change package, and the Netherlands has brought forward a programme of corporate and income tax cuts. While the balancing act across the eurozone remains fiendishly complex and highly political, there’s reason to believe that fiscal easing could relieve policymakers, companies and citizens from the long roll call of exogenous and endogenous pressures.

Being caught in the crossfire remains a major concern. As the largest player in world trade, the European Union’s export-oriented economy is highly sensitive to rising tensions – most notably between the US and China, but also with the US directly – as well as the aggregate pace of global growth. Although the International Monetary Fund expects this to lift to 3.4 per cent in 2020, the eurozone is forecast to grow by just 1.4 per cent, which is below the average rate for so-called advanced economies.

Among the eurozone’s internal problems, the most serious arguably involve its core member states. France continues to battle with social unrest, Germany’s gigantic manufacturing sector is still in the brace position, and Italian lawmakers oscillate between confrontation and accord with Brussels. A resolution to Brexit, should one materialise in 2020, is unlikely to provide much of a jumpstart to eurozone economic activity, although the lingering (if slight) possibility of a no-deal would have serious consequences for the bloc. Of all possible scenarios, analysts at Goldman Sachs still forecast that a last-ditch move to remain would have the greatest positive three-year impact on UK and eurozone GDP figures.

Un marché déconnecté

Seasoned continental investors could be forgiven for responding with a Gallic shrug. As they discovered in 2019, political uncertainty and slowing economic growth were barely reflected in stock prices, which renewed their ascent after the ECB cut rates and embarked on another round of asset purchases in September.

The MSCI Europe Small Cap Index had a strong year, although an enduring preference for blue-chips resulted in a 23 per cent return in the Euro Stoxx 50, just shy of the performance of the S&P 500. Our selection of 17 high-quality large-cap stocks – although heavily weighted to cyclical sectors such as consumer discretionary and staples, materials and industrials – fared even better, posting an average return of 25 per cent before dividends.

Re-running that screen for the year ahead provides a smaller selection of shares that match all tests, although several high-performing stocks – including luxury goods giant LVMH (Fr:MC) and Swiss chemicals group Sika (Sw:SIKA) – again make the cut. French cable and socket maker Legrand (Fr:LR) and Dutch photolithography supplier ASML (Ne:ASML) are among five high-quality large-caps to screen for the third straight year.

As growth slows, it’s reasonable to assume that investors’ appetite for paying for high-quality shares could diminish. “We are likely to witness a gradual pick-up in Europe as investment flows continue to migrate towards attractive relative valuations,” says Middlefield Canadian Income investment adviser Dean Orrico, who has noted several institutional investors rotating into value stocks.

With this in mind, the table below picks out nine shares from the S&P Europe 350 Index that meet at least eight of accountancy professor Joseph Piotroski's nine fundamental factors, as well as at least one measure of classic value – as measured by the relative strength of a stock’s dividend yield, enterprise-value-to-sales ratio, price-to-book value, enterprise-value-to-free cash flow ratio, or ‘genuine value’.

As ever, any allure could be checked by the complexities of buying and selling European stocks with a UK-based trading account. As we have frequently highlighted in past reviews, the withholding tax on most European stocks’ dividends is an inescapable pain for most UK investors, and cannot be altered by a tax-free wrapper such as an individual savings account (Isa) or a self-invested personal pension (Sipp).