The sustainable investor for a changing world

Asset allocation update – A deeper short in European equities

In light of the greater downside risk to company earnings in Europe as well as the prospects of rising interest rates and a recession, we have ‘doubled down’ on our previously modest underweight position in European equities, while maintaining a conservative view on taking investment risk.  

Reasons to be fearful

We believe there is greater potential for earnings to disappoint in Europe than in the rest of the world, which is not yet reflected in equity valuations. Another factor clouding the prospects is that discount rates are expected to rise quite markedly in Europe. The European Central Bank’s policy focus has shifted towards tackling inflation, notwithstanding the already pronounced downside risks to economic growth.

A third reason for the larger underweight is the impact from the conflict in Ukraine which we see as particularly intense for Europe’s cyclically geared and geographically close companies.

Lastly, analyst forecasts are calling for barely positive growth in second quarter 2022. This leaves Europe arguably closer to recession, certainly versus the US. There would be a larger knock on impact on corporate earnings given the high operational leverage of European companies.

Risks to future consumption – and growth

In the US, consumption has been broadly resilient so far. However, the 30-50% increases in inventories at US bellwether retailers such as Walmart and Target suggest that demand has moved on from where they expected it to be. Persistent and high inflation is a clear risk for future consumption, further complicating central banks’ ability to tighten policy without slowing growth too much.

Put differently, a soft landing looks more tenuous the longer current conditions last. This has been reflected in the notable flattening in yield curves in Europe and the fall in US breakevens in recent weeks. Liquidity conditions in fixed income, particularly European credit, have been challenging, although in European investment-grade, the spread widening has been indiscriminate.

Asset class views as of 7 June 2022


This material is issued and has been prepared by BNP PARIBAS ASSET MANAGEMENT UK Limited (“BNPPAM UK”). Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. BNPPAM UK is regulated by the FCA under UK laws, which differ from Australian laws. In Australia, BNPPAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the financial services. This material is distributed in Australia by BNP PARIBAS ASSET MANAGEMENT Australia Limited ABN 78 008 576 449, AFSL 223418.

This material is produced for information purposes only and does not constitute:

1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
2. investment advice.

Opinions included in this material constitute the judgement of BNPP AMAU at the time specified and may be subject to change without notice. BNPP AMAU is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.

Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material. Past performance is not a guide to future performance and the value of the investments in financial instrument(s) may go down as well as up. Investors may not get back the amount they originally invested.

The performance date, as applicable, reflected in this material, does not take into account the commissions, costs incurred on the issue and redemption and taxes. All information referred to in the present material is available on

Related insights

2021 Sustainability Report - Out Now
How will Europe secure the metals needed for its energy transition?