For several years, European markets have been seen as the poor relation of their US counterparts. Cheap money has buoyed the valuations of high-growth technology groups and young ‘disruptor’ businesses – a trend that has favoured US stock markets. Meanwhile, quality, cash-generative European companies have often been neglected and often severely undervalued.
But the tables are turning. In recent months, European markets have outperformed their US rivals and in an era of higher inflation and higher interest rates it may be time to look to the best European companies to deliver long-term growth.
Henderson European Focus Trust has always taken a long-term view of investment, looking for global champions whose shares are reasonably priced, and which therefore have the resilience to deliver long-term income and the potential for capital growth.
Europe’s economy is not without challenges. The war in Ukraine has created huge uncertainty, higher energy costs have further fuelled wider inflation which has been bearing down on consumers and investors. But there are significant strengths to the economy as a whole and, more importantly for investors, companies with immense potential and that offer exceptional value.
Eurozone economies are showing signs of sturdy growth. Just a few months ago, a European downturn was seen as almost inevitable, but recession appears to have been averted and forecasts for European economic growth in 2023 and 2024 are now being revised upwards. 1 Exports from the Eurozone are rising strongly and the re-opening of China’s economy earlier this year after its protracted Covid lockdowns, bode well for Europe’s trade outlook.
The pessimism of late 2022 meant many European businesses were priced for recession, but as that risk has waned and growth rebounds those valuations now look far too low, particularly in comparison with US markets.
Inevitably, the broadly positive outlook will not be felt by every company and sector, and inflation and higher borrowing costs will still be a headwind for some businesses. But many European companies are well-placed for these economic conditions and, because they have been undervalued in recent years, present a significant investment opportunity.
There is no guarantee that past trends will continue, or forecasts will be realised.
1 Spring 2023 Economic Forecast: an improved outlook amid persistent challenges (europa.eu)
The key to identifying these opportunities is an understanding of the mega themes that will drive secular growth in Europe in the years ahead: automation, digitalisation, electrification and onshoring. These are global trends that will bring greater efficiency to companies, shorten supply chains, and expand manufacturing in Europe.
Examples of the global champions include Belgian brewing giant AB Inbev, which has the scale and margins needed to weather inflation and regain market share from smaller rivals. Engineering groups Siemens and Schneider Electric are global groups who stand to benefit from growth in automation and digitalisation and the onshoring of supply chains.
Meanwhile, Europe’s aerospace sector is another opportunity to invest in global champions such as Airbus, while the onshoring of electronics supply chains – brining supply back to Europe from overseas – is a powerful tailwind for semiconductor sector groups such as ASM International, STMicroelectronics and BE Semiconductor.
These are the types of companies that were often undervalued in the era of cheap money, but the spotlight is shifting back, and the deep value and growth potential of these companies is becoming increasingly clear.
European markets now look cheap in comparison with US markets. Digging deeper, there are pockets of exceptional value to be found – quality, cash-generative European companies with long-term growth potential.
These are the types of businesses at the heart of Henderson European Focus Trust’s investment strategy. In an age of higher interest rates and inflation and a return to fundamental value as the bedrock on investment, a European focus could be exactly what investors need for long-term income and capital growth.
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