Investing in Two Battered European Equity Sectors

European equity markets are still struggling to overcome the effects of the pandemic. But diligent investors who look beyond the crisis can find surprising investment candidates among the wreckage, even in sectors such as aerospace and retail, which were hit particularly hard.

European stocks are lagging their global peers for the current year. The MSCI Europe Index fell by 12.2% through September 24, 2020, in local currency terms, while the MSCI World Index declined by only 1.7% and the S&P 500 advanced by 1.9%. We believe this is partly due to the perception early in the crisis that Europe would struggle more than other regions to contain the spread of the virus. But despite encouraging successes in many European countries, decisive lockdown measures and surprising cooperation throughout the region, Europe’s recovery path has not yet been fully reflected in stock prices.

Sharper Questions for Tougher Markets

Of course, this crisis in unlike any other. So, on top of their usual due diligence, investors should ask the following questions when analyzing a company: How exactly has demand been impacted, and for how long? Is the demand destruction due to behavioral or structural changes? Have the competitive dynamics of a sector changed? Does a company have the balance-sheet strength to survive these trying times? And finally, how much confidence can investors have in any of the answers to those questions, given the uncertainty about the pandemic and macroeconomic growth?

When asking these questions, investors should not automatically rule out distressed sectors. Indeed, two areas that might seem to be unlikely spots for investment deserve attention: retail and aerospace.

Aerospace: Finding Companies That Can Withstand Stress

Europe´s aerospace industry is facing unprecedented distress. Companies are facing significant demand destruction caused by governments’ near-total shutdown of commercial aviation. And behavioral changes also are taking their toll: tourists are still reluctant to fly, preferring to spend their holidays close to home, while business travel has been largely replaced by video conferences.