Insights


Return to Europe in Sustainable Style

25 November 2019

Investors find the glass half full

European companies posted net positive surprises during the Q3 results season (albeit on reduced expectations). More favourable base effects and expectation of a modest uptick in global GDP growth next year, along with resilient profit margins, have prompted expectations of mid-single digit EPS growth in 2020. 

If analysts are correct, Q3 could mark the trough of the earnings soft patch. Europe’s relatively open economy has meant that the economic slowdown has been more pronounced than in other regions, but equally stands to benefit more on recovery. Optimism also comes from hopes for fiscal spending under the new leadership of the ECB.

Investors have not missed this tentative improvement in confidence. They have responded to relatively positive economic announcements with a change in behaviour, as shown by net inflows into European equity ETFs in recent weeks. European equity price ratings are not expensive on a long-term perspective and could rise if certain sources of uncertainty reduce and the activity backdrop improves. 

Gain broad exposure to pan-European universe whilst avoiding controversial activities

Investors looking to invest in Europe also have the opportunity to do so in adherence with ESG principles. Moreover, this exposure can be accessed cost-effectively and without an impact on performance, as shown in the backtested index performance below.

STOXX Europe 600 Index is a key benchmark for pan-European exposure. With a fixed number of 600 components, the index represents large, mid and small capitalisation companies across 17 countries of the European region including France, Germany, Switzerland and the United Kingdom.

The STOXX Europe 600 ESG-X index, an exclusion index, launched in 2018 to provide exposure to these countries whilst adhering to the exclusion criteria most desired by investors (as revealed in investors surveys both by STOXX and State Street Global Advisors). The ESG screens are based on the responsible policies of leading asset owners and are based on data from ESG ratings provider Sustainalytics.

Companies excluded from the STOXX parent index are those considered by Sustainalytics to be non-compliant with the UN Global Compact Principles; are involved in controversial weapons; are tobacco producers; or that derive revenues from thermal coal extraction or exploration, or have power generation capacity that utilises thermal coal.

Over the last five years, returns for the ESG-X index are the same (5.7% p.a.) as the parent benchmark without suffering any extra volatility (this comparison includes backtested returns, as the inception date for the ESG-X index was 16 November 2018). Among the main goals of the index is to reduce reputational and idiosyncratic risks.


Same returns, better story

Source: STOXX, gross returns in EUR as at 21 November 2019. The inception date for the STOXX Europe 600 ESG-X index was 16 November 2018; performance prior to this date is backtested. Past performance is not a guarantee of future results. Results prior to this date were calculated by using available data at the time in accordance with the Index’s current methodology. Index returns reflect capital gains and losses, income, and the reinvestment of dividends.


Flows


European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)

European-Domiciled ETP Asset Category Flows ($mn)

Sources: Bloomberg Finance L.P., for the period 14-21 November 2019. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.


Fund Details


Source: State Street Global Advisors, Bloomberg Finance L.P., as of 31 October 2019.


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