In recent years, European markets have been defined by rising rates. Like many central banks around the world, the European Central Bank (ECB) has increased them in a bid to combat high inflation. ECB benchmark deposit rates have risen from below zero at the start of 2022 to its current 4% level.
This has brought down inflation but has also had a negative impact upon the valuation of a large number of high quality, growing businesses. Over the last few years, this has led to a difficult backdrop for Henderson EuroTrust (HNE) which has a long-standing bias to these kinds of companies.
Finding investment silver linings
We have used this difficult environment to add exposure to high quality businesses at what we see as attractive valuations – this has been the silver lining of a difficult three years. With so many investors focused on what the ECB has been doing, we have been able to buy some high-quality growth companies that have been too harshly punished by changes in market sentiment.
Three new positions in 2023 that stand out are Swiss testing company SGS, Dutch brewer Heineken and German sportswear brand Puma. All three are welcome additions to HNE because each meets the quality threshold we always look for, as well as having solid long-term growth prospects. We were able to buy these for the trust because their share prices had suffered amid the market volatility of 2023 and they had become, in our view, too cheap.
Though it hasn’t been an easy time to be a growth investor, we remain confident in our investment process. We are long-term investors and, fortunately, there are some signs that a more favourable environment could be returning to the market.
A new environment for 2024
Going into the New Year, it’s important to consider how the macroeconomic situation has changed. The ECB raised interest rates during 2023 to bring down inflation in Europe but at its most recent meeting, in October, it held off from hiking these further.
This was expected by many analysts and commentators as eurozone inflation has fallen. In fact, it less than a quarter that at its peak – falling to 2.4% in November from 10.1% a year before. Therefore, the conversation has moved on and some experts are now expecting the ECB to cut rates in 2024. This argument is boosted by the fact that high interest rates can suppress growth and recent forecasts for the region have been revised down. The ECB may not be able to keep rates as they are for much longer if it is to avoid causing a recession.
We are comfortable in our outlook as we have a portfolio of names well-positioned for this potential change in environment. That said, we will keep a close eye on the operational performance of the companies that we own.
Our optimism stems from the high quality of our holdings, which are frequently subject to drivers unrelated to their sector peers. For example, we are excited by the speed of uptake we are seeing in obesity medication and how this will impact Novo Nordisk, a Danish pharmaceutical company we hold that is a leader in this space.
Elsewhere, we have several positions that could benefit from improvements in food and drink consumption trends. For instance, the spirits sector has been impeded by destocking issues for some time, mostly a post-Covid effect. We are hoping these issues will end in 2024 and thereby improve trading conditions for French spirits company Pernod Ricard.
We are also excited about how AI will continue to flourish. ChatGPT captured investors’ – and the mainstream public’s – imaginations in 2023, and now companies in all sectors are frantically exploring how they can use it to drive productivity and enhance value. Europe is home to a thriving tech scene, and we are excited about our holdings in this space. We have three semiconductor companies – Holland’s ASML Holdings and Besi, as well as ASM International – and these are all obvious beneficiaries of the growing demand for the large-scale data storage and computing power that AI technologies require.
Glossary
Inflation – The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.
Macroeconomics/Microeconomics – Macroeconomics is the branch of economics that considers large-scale factors related to the economy, such as inflation, unemployment or productivity. Microeconomics is the study of economics at a much smaller scale, in terms of the behaviour of individuals or companies.
Valuation metrics – Metrics used to gauge a company’s performance, financial health and expectations for future earnings, eg. price to earnings (P/E) ratio and return on equity (ROE).
Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Disclaimers:
There is no guarantee that past trends will continue, or forecasts will be realised.
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
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