The Misconception of Value Investing in the Eurozone
There is an perception among many investors that Value Investing is a byword for underperformance. This perception is largely shaped by the experience of Value Investing in the United States, where growth stocks, and the so-called Magnificent 7 in particular, have dominated market performance. However, for eurozone investors, the reality is quite different.
Value Investing in the Eurozone has Outperformed
Over the last five years, value stocks in the eurozone, as measured by the MSCI EMU Value Index, have outperformed the core index by 0.4% p.a.(Figure 1). Looking at the three-year period, value has pulled further ahead, outperforming the core index by 1.6% p.a.1 This challenges the common narrative that value is a losing strategy and highlights the importance of looking beyond market sentiment and region-specific dynamics.
Figure 1: Sustained Value Outperformance in Eurozone
The Difference Between the US and Eurozone
The performance of the US equity market has been heavily driven by a small group of high growth technology companies, leading to the perception that growth investing is the only winning strategy. However, the eurozone market is structurally different, with a more balanced sector composition that has allowed value stocks to hold their ground. To get a sense of that difference, the IT sector makes for a great example: the eurozone index has a 12.7% exposure, significantly lower than the >30% weight in the US index (Figure 2).2
Figure 2: The Sector Differential – Eurozone vs US
What is Behind Value’s Strong Performance in the Eurozone?
Valuation gap
Many value stocks in the eurozone were, and still are, trading at significant discounts to historic averages, in both absolute and relative terms. At the start of 2025, the eurozone value index was trading at a price-to-earnings (P/E) multiple of 9.8x, which is at the lower end of its 10-year historic range and 18% below the 10-year median of 12.0x (Figure 3).3 In contrast, the core index P/E was trading at a premium of c. 50% to that of the value index – close to 10-year highs.
Figure 3: Value Discount Near Record
A major factor in this large discount being created over the past few years has been the Ukraine/Russia war which pushed energy prices (e.g. natural gas) to historically high levels, impacting the competitiveness of the euro area. The prospects of an end to the war have improved over the course of the last 12 months, contributing to a pick-up in performance by value stocks as falling gas prices softened the headwinds facing the economy.
Eurozone Financials Revival
Over the last year, the strong performance of the eurozone Financials sector, and of banks in particular, has been a key driver of Value’s outperformance. The MSCI EMU Banks Index was trading on a P/E of <6.0x in February 2024, a significant discount versus historic averages and US peers and reflective of very low expectations for the sector. More positively for investors, capital levels are generally resilient and significant regulatory changes are largely behind the industry. In addition, earnings estimates have been rising as the benefits of higher interest rates have flowed through to profits. Eurozone interest rates may be declining but this is still a more favorable environment for banks compared to the zero interest rates endured by the industry for much of the last decade.
The Case for Active Value Investing
While the broader eurozone market has a balanced sector composition, the EMU Value Index is more concentrated – financial stocks account for 37% of this index.4 The SSGA Eurozone Value Spotlight Strategy has outperformed both the eurozone core and value indices over the last three and five years (Figure 4). We believe that one of the strategy’s key advantages is its comparatively broad diversification, mitigating the sectoral concentration risks inherent in the value index such as the aforementioned weight in financials stocks (Figure 5). This allows for a more balanced approach to capture Value opportunities across different sectors and different economic environments.
Figure 4: Strategy Outperformance over Five Years5
Figure 5: A More Balanced Approach
The Opportunity
For investors focused on the eurozone, dismissing Value Investing based on a global or US-centric narrative could mean missing out on substantial opportunities. The data demonstrates that Value has delivered competitive returns over the last 1, 3 and 5 years. Despite Value’s recent outperformance the valuation gap between value and core indices remains wide. A recovery in the eurozone economy could help to further close this gap. The potential for the ending of the Ukraine/Russia war, in addition to the substantial spend on infrastructure and defense proposed by Germany, is likely to accelerate an economic recovery and favor value stocks. Our active strategy has delivered outperformance over the medium and long term and provides greater flexibility in stock selection and risk management, given the value benchmark’s concentration in certain sectors. Our disciplined investment process has delivered long-term outperformance against core and value indices and we believe the fund is positioned well to benefit from further value outperformance.