Europe is once again in the spotlight after significantly underperforming the US stock market for over a decade. The beginning of 2025 has been marked by sharp declines in US stocks and a massive rotation to the other side of the Atlantic.
Grant Cheng, a fund manager at Allianz Global Investors, believes that this is just the beginning of a powerful turnaround. European stocks are still valued significantly lower than American stocks, while economic prospects are shifting.
The EU Commission wants to release 800 billion euros for historic defense investments, and Germany is set to launch a 500 billion euro infrastructure fund. Meanwhile, the US is grappling with increased recession fears and persistent inflation, limiting the Fed’s ability to support the economy.
"If European companies’ earnings growth improves with the help of stimulus packages, the valuation gap between European and American stocks could narrow. This could provide a very strong momentum for Europe," says Grant Cheng from his office in Frankfurt.
Investing in Dividend-Paying Companies
Cheng manages one of the best-performing European funds in recent years. The Allianz European Equity Dividend fund has delivered a 47% return over three years – more than twice as good as the Stockholm stock exchange.
The focus is on European dividend-paying companies with strong balance sheets and cash flows.
"What we are looking for is quality combined with a reasonable yield. We call the strategy ‘quary’ – quality with a reasonable yield. ‘Quarry’ is also an English word for hunting something valuable, which we think fits quite well," says Cheng.
Allianz European Equity Dividend Fund Details
- Managers: Grant Cheng and Andrew Koch
- Managed Capital: 18,317 million SEK
- Management Fee: 1.80%
- 1-Year Performance: 12.1%
- 3-Year Performance: 47%
- 5-Year Performance: 107%
Top 10 Holdings:
- Siemens
- Roche
- TotalEnergies
- Volvo
- Sanofi
- Nestlé
- KBC Groupe
- Nordea
- Münchener Rückversicherungs-Gesellschaft
- GSK
The fund is clearly overweighted towards industrial and financial companies – two sectors that the manager believes will benefit from Europe’s planned investments.
"If we just talk about Germany’s infrastructure investments, you can get exposure to that theme through capital goods companies, as well as construction and engineering companies. We also believe that banks will indirectly benefit from increased demand for loans," says Cheng.
The manager highlights German company Siemens as an example of a capital goods company. In Sweden, companies like Volvo, Atlas Copco, Sandvik, and ABB are also included in the same category.
"Capital goods companies are the ones that provide the equipment. When infrastructure is expanded, electronics, machinery, and so on are required. We have a very large position in Siemens, which is also a clear winner in both automation and electrification."
Belief in Gothenburg Companies
In addition to infrastructure investments, industrial companies could also benefit from the military buildup planned in Europe.
"Without naming any names, I can give you an example. Imagine a ball bearing company somewhere in Sweden. Ball bearings are used in virtually all kinds of machinery. Such a company could become a very clear winner."
A not too daring guess is that the manager is referring to the Gothenburg-based ball bearing giant SKF. His veiled wording is due to Allianz Global Investors’ rules only allowing him to talk specifically about the fund’s largest holdings.
One of these is another Gothenburg company – Volvo. The truck giant is a typical example of the kind of company the fund invests in. The balance sheet is in very good shape, while the company generates strong cash flow and has a generous dividend policy, says Cheng.
"Moreover, the margin has improved to the best in the sector, and they have shown resilience in profitability. Martin Lundstedt has implemented a very successful restructuring since becoming CEO in 2018. We feel very confident in the business model."
Upside in Banks
The manager also feels comfortable with the fund’s heavy exposure to the financial sector. European banks were long out in the cold after the financial crisis, but in the last three years, the sector has surged nearly 90%. Despite the recovery, Cheng argues that valuations are still low.
"Many value European banks based on ‘old thinking,’ from a time when interest rates were zero or negative. But their earnings power is in a completely different place today. With a policy rate heading towards 2%, they can still generate good profits."
He emphasizes that many banks have also revamped their business models to be less interest rate-sensitive, for example by increasing the proportion of revenue from fees.
"That’s why we still see finance as a very interesting sector. We own, among others, Nordea and Bank of Ireland."
Competition from China
While the wind is currently blowing in Europe’s direction, Grant Cheng points out that there are still risks. The continent’s industry-heavy stock market is very cyclical, and it is unclear when the planned investments will be implemented. Additionally, some industries face stiff competition from China.
"If we take the automotive industry as an example, the challenges have increased – and that’s a risk that should not be ignored. Competition from Chinese electric vehicles is real. I think you in Scandinavia see more Chinese electric cars on the roads than we do here – but they are coming."
In conclusion, Europe’s resurgence in the investment world is gaining momentum, fueled by ambitious infrastructure plans and a shift in economic outlook. While risks remain, the potential for growth and value in European stocks, particularly in dividend-paying companies and sectors poised to benefit from government investments, is a compelling opportunity for investors looking beyond traditional markets.