A changing backdrop for European smaller companies

What is the state of the European consumer?

I’d say the European consumer is starting to feel a little bit more positive. But energy prices have hurt the European consumer so this is going to be a slow, gradual build. There are areas where they have continued to spend. Travel, summer bookings are up really strongly and we are exposed to that. Also entertainment, people seem to be willing and wanting to go to that, I don’t know, whether it’s a Coldplay concert or whatever, in live entertainment. So there are definitely areas that remain strong and I would be more hopeful as we go into the second half of the year that things will improve elsewhere.

Is now a turning point for European equities?

I think for European equities as a whole, last year it was deemed uninvestable almost. You know, we had Ukraine, the war, which is not resolved. But what has got better is that China has opened up again which is key for Europe. Europe is pretty exposed to China. And inflation has seemingly peaked and energy prices have seemingly peaked. So two of the three things that stopped people investing have seemingly passed their worst.

So, I think Europe looks pretty interesting. European small cap is trading at a discount to large cap. It did underperform larger companies last year – not surprising with higher energy costs and higher interest rates, financials and energy did well, which is skewed towards larger companies – the BP’s and Shell’s of this world.

How are you tapping into the European energy transition?

All European smaller company funds are exposed to this energy transition because this is where you find the pure niches, so I mean it really is exposed. You know, whether that’s Nexans, a high voltage cable company which is important to connect those wind turbines to the grid, or whether its inter-aray cables from Twentsche Kabel Holdings in the Netherlands to connect the wind turbines. Meyer Burger which is doing solar modules. People want a supply that isn’t Chinese it would appear, you know, [given] the political situation. So, there are lots of pure ways of playing energy transition within European smaller companies and again, importantly, at reasonable valuations.

What is your outlook for European smaller companies?

Overall, pretty positive. It’s not sort of all gung-ho, there is quite a lot of cynicism out there. There will be volatility, I think there is some hope that inflation will disappear and we will be back at 0-1%. I personally don’t think that will be the case hence why I think valuations will remain important. But broadly, look, its nowhere near as bleak as people thought at the back end of last year. And at the margin I think things will continue to get a little bit better. So, I’d be reasonably optimistic about European smaller companies and the equity markets as a whole.