But will market participants take notice? Or will capital remain highly concentrated in the US, where only a handful of stocks continue to lead?
What are markets missing out on?
European equity revenues are more geographically diverse than the US market. Europe also offers broader sector returns than the US, where technology stocks disproportionately drive the market. Meanwhile, a period of geopolitical stability would attract investors to Europe. That’s because the Continent is more plugged into global economic growth than the US.
That said, we would encourage investors to focus on specific European stocks rather than the whole market. The key is to invest in those businesses with the potential to deliver consistent, positive long-term returns. For us, international investors who turn away from the European market are missing out on the opportunity to invest in world-class companies.
Where do we see long-term opportunities?
There are prospects across Europe, but areas of strength include industrials, technology, healthcare, luxury goods, speciality chemicals and consumer staples. These sectors will be driven by big global themes, such as changing demographics, the energy transition and increased corporate investment in technology. Numerous European firms are also ideally placed to benefit from the burgeoning and increasingly affluent emerging-market consumer.
How does this look in practice?
ASML Holding develops, produces, and markets semiconductor manufacturing equipment. The company has a monopoly on the machines critical for making the advanced chips that will drive the current and future revolutions in computing, notably AI. We believe this edge gives it pricing power, high degrees of growth visibility and the ability to make attractive returns on capital. Management has framed 2024 as a transition year, which should translate into a successful 2025. Geopolitical tensions around China and related ‘chip wars’ are a concern. However, the company’s current strategy should mitigate against the worst-case scenario (a blanket ban). Importantly, its valuation suggests scope for meaningful outperformance due to expected growth and returns delivery.
Turning to pharmaceuticals, we have Novo Nordisk. It’s a leader in diabetes care and offers insulin delivery systems and other diabetes products. The company successfully relaunched its high-profile obesity drug Wegovy to much fanfare. This could be an important source of future growth. Novo Nordisk’s deep scientific expertise and an industry with high barriers to entry mean it should maintain its strong market position. This standing also underpins the potential for double-digit revenue growth across the business.
One sector where Europe leads the world is luxury goods. And in this space, LVMH, which owns world-famous brands like Moet, Louis Vuitton and Dior, stands out. Following a strong 2021, there’s little evidence of a deterioration in its operating performance. Pricing power built on best-in-class brands and unshakable demand should provide insulation against cost inflation. The industry has proved relatively resilient in previous bouts of market upheaval. Increasingly wealthy emerging-market shoppers should also help drive sales in the coming years.
Lastly, there’s cosmetics giant L’Oréal. In our view, it has one of the most robust business models in Europe. The shift to online sales has cemented its dominance, while its valuation is reasonable given its long-term growth outlook. Like LVMH, its exposure to rising developing-market affluence is a potential performance driver.
What factors are required for Europe to regain its appeal among investors?
Firstly, existing earnings expectations must underpin the cheap comparative valuations with other global equity markets. Secondly, European companies must deliver superior and sustainable earnings growth – a key factor in attracting investors. A third element is avoiding the political/economic challenges that have marred much of the past decade and consistently deterred international investors. Finally, a sustained period of stability characterised by cash returns and growth will be the best recipe to make Europe attractive again in the eyes of investors.
These factors, combined with a well-selected and focused portfolio, mean European equities can potentially compete with any in the world over the long term.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.