European Value Investing

Hidden Opportunities

Energy transition

Recovery post-crisis

Stocks at a discount

Why Now is the Time to Seize Opportunities

European Value Investing

Value investing focuses on identifying undervalued companies with solid fundamentals that are trading below their intrinsic value. In today's market landscape, Europe stands out as a compelling opportunity for value investors, with its array of discounted valuations, potential for cyclical recovery, and unique sector-specific growth catalysts. Notably, in 2024, European value stocks had already begun to outpace their growth counterparts, reinforcing the region's appeal to discerning investors.

Economic Recovery Post-Crisis

Over recent years, European equities have generally traded at lower price-to-earnings (P/E) ratios compared to their counterparts in the United States and other developed markets. This persistent undervaluation is partly due to a combination of economic uncertainties, geopolitical tensions, and slower growth rates that have historically dampened investor sentiment. The MSCI Europe Value Index is currently valued at a forward P/E of 10x versus the S&P 500’s 24x (source: Bloomberg, January 2025).

Historically, valuation gaps have tended to close during periods of economic stabilization and policy easing. The degree of undervaluation of European Value stocks relative to US equities, represents a significant investment opportunity as this gap closes.

The Eurozone's GDP is projected to grow by 1.5%-2% in 2025, spurred by easing inflation and proactive government initiatives aimed at boosting industrial activity. This creates a conducive environment for value stocks to thrive. Additionally, the European Central Bank (ECB) is anticipated to implement interest rate cuts, which will ease financing conditions and enhance corporate profitability. As inflation stabilizes around the 2% target, it is expected to further bolster consumer spending and corporate investment, reinforcing the economic backdrop for value investing in the region.

The companies mentioned in this article are part of the EdenTree and/or Pzena Europe strategy portfolios available on the ABN AMRO Investment Solutions’ platform. Value stocks have responded differently across regions and styles, reflecting distinct market dynamics. The chart below highlights these differences, reinforcing the case for European value investing in the current environment.

In this evolving post-crisis landscape marked by recovery and transformation, several key catalysts are emerging that underscore the potential of value stocks in Europe. Post-pandemic and energy crisis, many European companies have focused on deleveraging, improving profitability, and optimizing operations. For example:

Energy Transition and ESG Opportunities

Amidst this transformative period, one of the most significant shifts is the global move towards sustainable energy practices, where Europe is at the forefront of the global energy transition, setting ambitious targets for reducing carbon emissions and increasing the share of renewable energy. This shift presents significant opportunities for companies involved in the energy and utilities sector. Firms like Enel and Shell, which are actively investing in renewable energy projects and sustainable practices, are well-positioned to benefit from this transition.

While M&A activity is never part of the investment thesis for firms like Pzena, it’s not uncommon for companies that they invest in to be seen as attractive candidates for corporate buyers or private equity investors, due to their depressed valuations. For example, companies such as Reckitt Benckiser (Pzena) and Sanofi (Pzena/EdenTree) are considered attractive acquisition targets due to their strong brand recognition and market presence, despite current underperformance in valuations. In addition to broad market catalysts, unique sector-specific opportunities are emerging across Europe, offering targeted avenues for value investors to capitalize on industry-driven growth and transformation.

M&A Activity Hidden opportunities for value investors

Financials Benefiting from improved net interest margins and strong balance sheets European banks, such as BBVA (EdenTree) and ING (EdenTree/Pzena), are benefitting from higher net interest margins and stabilizing credit quality, but remain undervalued relative to U.S. peers.

Industrials and Energy Positioned to benefit from ongoing infrastructure investments and the green transition Industrial leaders like Umicore (Pzena), Signify (Pzena) and Balfour Beatty (Pzena) are well-positioned for Europe’s reindustrialization efforts. Energy companies, including Shell (Pzena), are adapting to the green transition while maintaining strong cash flows from traditional energy.

Consumer Staples Defensive and resilient, offering high dividend yields amid economic uncertainty High-quality companies like Reckitt (Pzena) and Tate & Lyle (EdenTree) continue to deliver strong performance globally but trade at relatively cheaper valuations compared to similar U.S. brands. European value stocks, particularly in these sectors, offer higher dividend yields (3-5%) compared to U.S. counterparts, providing income stability in uncertain markets.

Case Studies and Examples

Consumer Discretionary: Mercedes Benz - P/E ~5.6* (Pzena) Mercedes-Benz trades at a significant discount despite its strong cash generation and healthy balance sheet. Pzena believes the company is well-equipped to navigate the auto industry’s challenges, including the EV transition, and competitive pressures from Chinese car manufacturers.

Financials: BBVA -P/E ~6.6* (EdenTree) A leading European bank with a robust balance sheets and growing dividends.

Consumer Staples: Tate & Lyle - P/E ~17.7* (EdenTree) Renowned British multinational specializing in food and beverage ingredients with a relatively modest valuation.

Industrials: Veolia Environment - P/E ~18.1* (EdenTree) The company has strong pricing power and consistent revenue growth, making it attractive for long-term value investors.

*Source: Bloomberg, January 2025

European value investing offers a rare combination of attractive valuations, improving fundamentals, and a recovering economic landscape. As Europe regains its footing post-crisis, value investors have the chance to capitalize on mispriced opportunities. Investors should consider allocating a portion of their portfolio to European value stocks as a hedge against volatility in high-growth markets, providing a strategic diversification that reduces the concentration risk associated with U.S. growth-heavy portfolios dominated by technology stocks. This approach is exemplified by two of our subadvised strategies, ABN AMRO Pzena European Value Equities and ABN AMRO EdenTree European Sustainable Equities[1], seeking to identify undervalued opportunities within the European market to deliver strong, long-term returns.

[1] Please refer to the prospectus of the funds and to the KID before making any final investment decisions. See final disclaimer below.

The differential in performance between the MSCI Europe and the S&P 500 indices is the technology stocks that make up a large proportion of the U.S. market – illustrating the concentration of those index gains. Given the valuation discount of the European market vs. it’s U.S. peers, EdenTree feels there are hugely compelling opportunities to own quality, global, companies at attractive valuations. One such opportunity has arisen in the way of Pirelli – the manufacturer of premium and prestige tyres for the high-end consumer segment around the world. Whilst the European auto industry is facing many known headwinds, leading to a de-rating across the sector, the tyre manufacturers in our opinion have been unfairly caught up in this price action. The tyre manufacturers, unlike the original equipment manufacturers (OEMs), have far more defensive business models due to the tyre replacement cycle which provide these companies with consistent and healthy levels of free cash-flow (FCF) generation even in downturns. Furthermore, there is a long-term structural growth opportunity in the way of the transition to electric vehicles (EVs). Two thirds of Pirelli’s revenues come from its High Value segment (tyre rims >18”) which is its higher margin business. EVs due to their extra-weight vs. internal combustion engines (ICEs) require these larger tyres and thus as we see the increasing EV penetration rates globally – we should expect more demand for Pirelli’s higher-margin offering. In the nearer-term, whilst the scrapping of EV incentive schemes in the United States slow the overall rate of transition to EVs, there are still some positives for Pirelli – namely the global trend towards larger vehicles (namely SUVs) which also require the product offering of the High Value business segment. So overall, Pirelli is an attractively valued, quality business, with more defensive characteristics than its auto-peers, where we see headline growth in its main business segment driving margin expansion for the business.

EdenTree aims to seek out companies that aren’t simply undervalued but those they believe to be poised to perform well and grow cash flows over the long term.

Europe has been contending with a host of macroeconomic headwinds in recent months, none of which are without precedent and all of which have the potential to reverse, or at least improve Markets have thus applied an unusually large discount to European-domiciled companies, which we believe presents skewed performance outcomes—particularly for businesses that are not completely reliant on Europe for their long-term profitability. Pzena recently invested in Burberry Group. Burberry Group is a leading British luxury apparel company, and top 10 globally among major brands. Ready-to-wear apparel and leather goods have been relatively weak as the company has had three creative directors in the past 6 years, however its timeless trench coat and scarf business has been resilient. Further, relative overexposure to Chinese customers has led to underperformance vs the industry. Pzena believes the company is taking the right steps to turn around performance by refocusing on its core outerwear and scarf business. With stabilizing apparel sales and a recovery in Chinese demand, they believe Burberry can recover to prior earnings levels. Even if the macro environment does not renormalize, Burberry's earnings can recover if the company pivots to a broader distribution model, which other brands have successfully done in the past. In their recent meeting with the new CEO Josh Schulman, Schulman reaffirmed the strategy to refocus on brand rather than creativity. Additionally, he is looking to improve efficiencies through eliminating excess inventory and reconfiguring floorspace in stores. They were encouraged to hear that the new strategy is showing early signs of working. The company subsequently reported quarterly earnings in January well ahead of consensus. The positive results were due to strong sales, especially in the US, and continued progress clearing excess inventory. While the stock has performed strongly over the last six months, Pzena views the recovery to be still at an early stage, and the company remains attractively valued based on Pzena’s estimate of normalized earnings.

Pzena defines value as companies that are trading at a discount to their intrinsic value, and focuses only on companies whose earnings are below their normal long-term earnings power.

Principal and Portfolio Manager, Pzena

Miklos Vasarhelyi

Have questions or need more information? Contact us at aais.contact@fr.abnamro.com and schedule a consultation with our experts.

European Equities and Value Stocks at a Discount

Quantitative Strategist, ABN AMRO Investment Solutions

Benoît Begoc

Associate Fund Manager, EdenTree

Lauren Smith

Michelin prioritized cost efficiency and profitability over sheer volume growth. The company streamlined production, focused on premium and high-margin tires, and leveraged innovation to improve pricing power. These strategic moves enhanced its financial resilience, making it a compelling case for value investors such as EdenTree and Pzena.

Michelin (EdenTree/Pzena)

ArcelorMittal took significant steps to strengthen its balance sheet by reducing debt while improving operational efficiency. The company benefited from strong steel demand recovery and disciplined capital allocation, allowing it to generate substantial free cash flow and return capital to shareholders. Additionally, ArcelorMittal is investing heavily to decarbonize the production of steel putting it at the forefront in its industry. This, and the company’s improved financial resilience makes ArcelorMittal an attractive value investment opportunity, in Pzena’s opinion.

ArcelorMittal (Pzena)

Mercedes-Benz implemented a strategy centered on improving margins rather than just volume growth. By focusing on higher-end models, streamlining its cost structure, and enhancing supply chain efficiency, the company significantly boosted profitability. In addition to being a leader in the transition to electric vehicles (EV) technology, Mercedes-Benz’s financial resilience and operational excellence make it a compelling value opportunity, according to Pzena.

Mercedes-Benz (Pzena)

Catalyst: Its focus on high margin luxury vehicles and cost optimization efforts, which aim to enhance profitability and unlock shareholder value.

Catalyst: Higher interest rate environment boosting net income.

Catalyst: Acquisition of CP Kelco for $1.8bn to expand its high-value food ingredient portfolio.

Catalyst: Asset divestments and ESG tailwinds drive profitability and growth.

Case studies

Contact

Enel is at the cutting edge of this shift, investing heavily in renewable energy, smart grids, and electrification. Despite being undervalued today, these long-term strategic moves position the company as a key player in the transition to a more sustainable economy, offering attractive opportunities for value investors.

Enel (EdenTree/Pzena)

Shell is transitioning from traditional oil and gas to a leader in gas as a transition fuel as well as renewable energy, focusing on, renewables, electric vehicle infrastructure, and hydrogen technologies. The company aims to reach net-zero emissions by 2050, with investments in offshore wind, solar, and carbon capture. Despite these long-term moves, Shell remains undervalued, offering potential for value investors. Its strong cash flow, combined with its push into green energy, positions it well for the future energy transition.

Shell (Pzena)

ESG integration is reshaping corporate strategies, unlocking growth in renewable energy, green financing, and sustainable consumer goods.

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