Inflection Points

Key Takeaways

• Inflection points are times of structural change or turnarounds, a point that we believe Europe is in today.
• These inflection points can be powerful – it’s important to pay attention to them.
• Capturing inflection points can be highly rewarding for investors, but it requires following a disciplined process and staying diversified through market cycles, as opposed to trying to time them. 
  
   

A couple weekends ago, my partner shared with me the history of International Women’s Day, a cause close to her heart. I learned about Elizabeth Cady Stanton and the tea party that helped spark a revolutionary movement for women’s rights. A singular moment – the Women’s Rights Convention in New York – changed the course of history.

Our chronology is shaped by what some refer to as ‘turning points’, and what we label as ‘inflection points’. These events are key transformational moments that play a key role in reshaping industries, societies, and global structures. The Women’s Rights Movement (1848), the Civil Rights Movement (1950s and 1960s), the fall of the Berlin Wall (1989), and the rise of the internet in the 1990s are all examples of events that fundamentally altered the path of the world.

European markets may be at a tipping point 

We believe European markets are on the verge of an inflection point today, experiencing a structural turnaround from low growth to stronger growth. Germany’s newly elected leader recently sent shockwaves through the market with the phrase “whatever it takes”, signalling plans to ease its “debt brake” or, in other words, take on more debt to finance increased spending. The proposed plan¹ includes a special €500 billion infrastructure spending fund, equating to approximately 12% of GDP.

While we remain wary of the expression “this time is different”, this could be a watershed moment for Germany and Europe:

1. “Whatever it takes” signals strong intent and is reminiscent of what former European Central Bank President (ECB), Mario Draghi, said in his 2012 speech. It is widely seen today as the ‘turning point’ in the European sovereign debt crisis.  
2. Germany has one of the healthiest balance sheets among its peers after a decade plus of austerity. Therefore, it has the capacity to increase spending for executing its growth plan. 
3. Given the changing geo-political dynamics, Germany and Europe may not have much of a choice. Recent events have called into question the decades long Trans-Atlantic partnership between the U.S. and Europe. The pressure for Europe to become more self-sufficient appears to have reached a tipping point. 
   
   

The great shift: from “Mag 7” to European markets 

Many investors, especially in Canada, have been fixated on the recent tariff conflicts and the overpowering U.S. market performance. However, our team has noticed the beginning of a shift in the market narrative. Investors have finally started to reward and pay attention to fundamentals outside the “Mag 7” tech stocks that have been dominating U.S. equity returns. Figure 1 shows the year-to-date (YTD) total returns for the CWB McLean & Partners International Equity Pool vs. the ACWI ex-US (international) benchmark and the S&P 500 (U.S.) Index. While tempting to sidestep International investing with the U.S. tech dominance during the last couple of years, the YTD return trends remind us that International markets provide diversification and risk management benefits. 

Figure 1: Inflection points can be powerful 

Source: Bloomberg

Standard Performance Trailing Returns (%)

Source: CWB Wealth. Data as at February 28, 2025. 

While the “whatever it takes” rally is recent, International markets have been rallying since mid-January for a myriad of reasons². We believe it all comes down to one fundamental driver: International markets were being priced for continued weakness. Investors have finally woken up to the fact that in markets, akin to life, nothing is permanent. 

Why have the markets responded the way they have?

First, the potential fiscal package is material. For instance, Morgan Stanley estimates that one impact of the policy could be on industrial production (IP). German IP grew at 0.7% from 2011 to 2019 and could accelerate to 2% in the next decade. At a company level, this could result in double digit earnings growth. Second, European and German companies have been trading at historically low valuations. So, a re-rating or normalization of valuation levels would be warranted on top of the earnings growth: a double whammy upside for stock market returns. 

Given their powerful nature, the next question is how do we seize inflection points? History has shown that market timing is extremely difficult, if not impossible. The key is to focus on a disciplined process that is applied consistently. We’ll demonstrate this on a bottoms-up basis with LANXESS, a German specialty chemical company.

Company Profile

LANXESS has been under pressure since the Russia-Ukraine war, which eliminated cheap Russian gas supplies, a key raw material, to Germany. The sector has also faced demand headwinds in China, an important market. Predicting when the cycle will turn, like market timing, is a difficult endeavor. Instead, we focus our efforts on stress testing our companies through various scenarios. Our assessment of the company’s balance sheet and quality of its management team gave us comfort that it would survive the downturn. We firmly believed the company had potential to generate excess returns when the cycle turns and catalysts emerged; further helped by a historically low valuation multiple and depressed earnings expectations. 

Many investors, however, were skeptical. The stock plunged by close to 70% at one point and was priced for bankruptcy. With our thesis intact we, however, stayed invested and added to our position. In our opinion, this is the type of uncomfortable and unconventional thinking that leads to great investment opportunities.

At the portfolio level, our fundamental bottoms-up investment process led us to allocate 19% of the CWB M&P International Equity Pool to Germany; this compares to 6% for the benchmark (Figure 2). While most investors lost interest in Europe and Germany in recent years, we felt different. The active allocation to the region is not to profess that we have an edge in predicting macro events, it is a result of our stock picking process because we felt the risk/reward for German companies was asymmetric and skewed in our favour.

Figure 2: Average weight of Germany (%)

Source: Bloomberg. YTD average weight as of March 21, 2025.

For our clients, capturing inflection points means being diversified across and within markets. It’s extremely difficult to predict which market will perform best in any given year and investors tend to gravitate towards areas of the market that have recently worked. This is why we’ve seen money flow out of European stocks and into the U.S market in recent years. Diversification provides shock absorbers to events like President Trump’s chaotic tariff agenda. Currently, if you allocate capital internationally, you can buy into one of the top three global economies (as well as its quality businesses), while it’s still trading at a significant discount.

While the new German policy pivot is undoubtedly a positive development, we remain committed to what is in our control and staying obsessively focused on what matters: our investment philosophy, process, and, most importantly, stewarding our client’s capital.

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