Europe’s economy is heading for recession. The war in Ukraine, an energy crisis, rising inflation and rising interest rates are increasingly starting to hamper economic growth. With cyclical sectors in particular are expected to be affected, as they are the most sensitive to the state of the economy. However, the impact of an economic slowdown can be different for each sector. In any case, the price performance of the various sectors this year shows no in any case, no unambiguous picture and there is also a large dispersion in returns.
The European economy is heading for a sharp decline in growth and possibly even a recession in the coming quarters. Most economists now agree on this. Yet the year was still rosy. Even after the shock wave caused by Russia’s invasion of Ukraine, the economy initially held up pretty well. Real GDP growth in the EU surprised even positive in the first half of 2022 as consumers continued to spend vigorously resume following the easing of COVID-19 measures. Over the first six months, the economy grew by a solid 3.3%, according to data from the European Commission. That trend continued continued in the third quarter, even if it was at a considerably slower pace.
However, the effects of the war in Ukraine were inescapable. Global demand for goods and services declined and inflationary pressures increased. In this regard, Europe was the region that was hardest hit globally, given its geographical proximity to the war and its strong dependence on gas imports from Russia. Nowhere else does the energy crisis weigh so heavily on households’ purchasing power as within our continent. Inflation for the first 11 months of the year as high as 9.3%.
Outlook not rosy
The outlook for 2023 is not rosy. For the EU, a moderate GDP growth of 0.3%, well below growth over 2022 so far, while inflation is is likely to remain high at 7.0%, according to the European Commission’s forecast. In a response to turbulent price developments, central banks worldwide, including the European Central Bank, have raised interest rates in several steps in recent months.
Under such an economic constellation, stocks from sectors more sensitive to the state of the economy are expected to bear the brunt. Morningstar divides sectors into three groups. Sectors that are cyclical and therefore highly dependent on the state of the economy, economically sensitive sectors and defensive sectors, or those with little or no dependence on the state of the economy. The former category includes commodities, cyclical consumer goods, financial services and real estate sectors.
A closer look at the performance of those four sectors this year shows that some sectors are indeed suffering from the bleak economic climate, while others seem to be rather benefiting from it. For instance, financial services stocks performed relatively well with a narrow loss of just over 1% over the period from January to the end of November, while MSCI Europe fell 6.2% over the period.
Companies in the commodities sector also managed to perform reasonably well with an average return of -5.91%. In particular, companies directly related to commodities such as trading house Glencore (56.1%), mining companies Rio Tinto (23.4%) and Anglo American (17.8%) managed to achieve good performance. This is in contrast to companies focusing on fine chemicals activities, such as Sika (-33.8%), Croda International (-33.9%) and DSM (-37.3%), which performed significantly worse.
Consumer goods struggle
Shares in the cyclical consumer goods sector also struggled hard. The sector posted losses of 13.2% on average. Among the biggest losers were meal delivery companies and meal boxes Just Eat Takeaway (-55.5%), Delivery Hero (-58.2%) and HelloFresh (-65.4%). But fashion companies such as JD Sports (-43.6%), Adidas (-51.1%), Puma (-54.3%) and Zalando (-58.2%) also struggled. This was in contrast to several carmakers that actually managed to stand out by posting hefty share price gains, including Porsche (25.8%), Bayerische Motoren Werke (19.8%) and Renault (14.0%).
However, the biggest hits were in the real estate sector with an average share price loss of almost 34%. Rising interest rates made the biggest victims here, including LEG Immobilien (-48.8%), Aroundtown (-54.5%) and Fastighets (-60.2%).
This week’s top five lists the five funds with the largest exposure to cyclical sectors (of which a distribution fee-free share class is available in the Netherlands) in the Morningstar categories Equity Europe Large-Cap Value, Equity Europe Large-Cap Mixed and Equity Europe Large-Cap Growth.
JPMorgan Europe Strategic Value
JPMorgan Europe Strategic Value has the largest exposure to cyclical sectors among all European Large-Cap equity funds. Michael Barakos has been swaying the sceptre here since 2004 and since 2014 he has done so together with Ian Butler, while Thomas Buckingham joined the team in 2017. Together, they look for companies with strong fundamentals, but in doing so they are very focused on equity valuations, so the portfolio is normally of a value nature even though the managers can invest in the entire European equity universe. As of the end of November 2022, the portfolio has particularly high exposure to the financial services sector. Here, the managers invest in companies such as HSBC, Allianz and Zurich Insurance Group, among others. Collectively, banks and insurers account for 39% of the portfolio. Commodities and consumer cyclicals each account for just over 8% of the portfolio, while real estate is completely absent.
In fifth place is AAF-Edentree European Sustainable Equities. This fund offered by ABN Amro invests in Edentree’s sustainable European equities strategy. This makes the large exposure to cyclical sectors immediately special, as this is rare in sustainable strategies. However, managers Chris Hiorns and David Osfield look for quality companies with attractive valuations and high dividend yields, and that steers them towards cyclical sectors that are inherently more value-driven. The financial services sector is overweight and takes up around a quarter of the portfolio. Banco Santander, Bank of Ireland and ING Group are the main holdings here. Commodities and consumer cyclicals both have an allocation of around 10%. Finally, the real estate sector accounts for almost 4% (Covivio and Land Securities).
Top 5 YTD for the Netherlands:
Top 5 YTD for Belgium:
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.