Top of mind -
Uncovering prime opportunities in Europe
In a world of ever-evolving markets and global dynamics, Europe's recent economic challenges, geopolitical uncertainties, and cyclical nature have given investors reason to feel cautious; However, we see opportunities beneath the surface.
George Rudland, Senior Investment Manager, explores the European investment landscape that has captured both scepticism and intrigue. He delves into industries and companies that are reshaping the continent's investment potential, from healthcare and technology innovators to fashion and luxury giants.
Market participants have often been sceptical of investing in Europe, and rightly so. The European stock market has materially underperformed the US over the past decade. Add into the equation the war in Ukraine, slowing economic growth, and a dynamic political landscape, it is understandable that investors are nervous.
However, the backdrop for Europe is not all doom and gloom. After a year-long manufacturing downturn, we are beginning to see some early signs of stabilisation as inventories have been depleted and China imports are starting to accelerate. Moreover, the inflation story is improving, with JP Morgan predicting core inflation to fall to 4% by the end of the year, boosting income for European households and reviving the economy.
European companies are also looking attractive as they now trade below their long-term average valuations and at an almost 30% discount to the US market.
Given the cyclical nature of the European economy and with weakness in manufacturing, we have not been surprised by the recent underperformance in Europe; as a result, we are underweight in our allocation. However, while Europe might be out of favour, the top-down macro-economic picture could be improving, providing a set of circumstances where opportunities are likely to exist.
Here are a few examples:
- Novo Nordisk, the Danish pharmaceutical business is a few months short of celebrating its 100th birthday and is a market leader in diabetes and obesity care. The company’s exciting recent growth centres around its range of drugs for treating type 2 diabetes, Ozempic and Wegovy. These have also been proven to be successful in dealing with obesity. The diabetes market is estimated to be around $30bn while the obesity market could be worth in excess of $100bn, with very few participants operating in this field. Analysts are becoming increasingly enthusiastic about the shift in approach towards addressing weight as a means to tackle the substantial financial burdens linked to obesity-related illnesses.
- ASML is the sole supplier of extreme ultraviolet lithography machines that are needed to manufacture the most advanced microchips. The company has captured over 90% of the market to supply the semiconductor industry. These microchips are used in all our devices and are crucial components in advancing the operating performance of cars, phones, and medical equipment to name a few. Through world-leading research and development, ASML have enabled microchips to become smaller and more powerful. Looking to the future, the next generation of microchip design will help innovation in areas like automated transport, artificial intelligence, and faster connectivity all underpinned by ASML’s market leading technology.
- Stepping away from science and technology, one of the most valuable businesses in Europe dominates the world of fashion and luxury goods. Louis Vuitton Moët Hennessy (LVMH) has a portfolio of brands we have all heard of. LVMH is a well-run business with a track record of market share growth across its brands. With strong financial discipline and profit margin growth, LVMH consistently delivers robust returns to shareholders.
Notwithstanding the cyclical nature of the European market, the lion’s share of our allocation has been in quality, world leading companies held by our chosen fund managers. In our opinion, these high-quality companies can ride out periods of macro-economic uncertainty, as they have proven to do so, time and time again. To conclude, there is a lot more to the European investment landscape than just car manufacturers and airlines, and it is our obligation as investment managers to uncover these exciting investment opportunities for you.
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