30 July 2026 (pre-recorded 22 July 2026)
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[INTRODUCTION]
Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This interview explores where sustainable income is emerging in Europe and why active stock selection matters in a changing geopolitical and economic environment.
Joss Murphy (JM): Hi, I’m Joss Murphy, research analyst at FundCalibre. Today, I’ve been joined by Stuart Brown, co-manager on the BlackRock Continental European Income fund. Hi, Stuart. How are you?
Stuart Brown (SB): Good afternoon, Joss. It’s a pleasure to be here doing well, thank you.
[INTERVIEW]
JM: European equities have often been viewed as an attractive hunting ground for income investors. What makes Europe particularly compelling today, and where are you finding the most reliable and sustainable sources of dividend growth?
SB: Absolutely. So, Europe has been kind of considered as an attractive market for income investors in particular for a long period of time. That kind of comes down to a broad culture of paying dividends and to some degree, a dividend yield which is generally speaking attractive relative to other markets. I think, you know, those things remain the case. I think what makes Europe sort of particularly compelling, from our perspective, from an income perspective and more broadly is the sort of total returns are broadening out beyond just the dividend yields.
So, you know, what’s changing? You know, we are seeing the earnings and dividends as a result outlook, improving quite materially in a number of areas. I guess sort of historically, we would’ve thought about sort of sourcing our resilient dividend growers, within sectors like consumer staples, healthcare, perhaps in this sort of software and data services parts of the market. And we think sort of those parts of the market are, facing more challenges than they have historically. And where we’re finding ideas that can kind of compound dividends over time is slightly different to the past.
So we’re seeing, you know, lots of opportunities within the industrial space, many very high quality companies, well positioned in their industries, attractive returns, and economics, and growth outlooks which are, you know, materially better than the past.
So we think about areas like electrification, energy security, supply chain resilience investments, and even broaden that. We also find quite a lot of opportunities within the financial space. So the banks are in a really healthy position and actually sort of moving into a position where we think they can continue to deliver sort of sustainable earnings and as a result, dividend growth.
And lastly, the utility space where, it’s sort of got a sort of challenging long-term picture, but we think things have changed quite materially in the last few years to shift us, more to an environment of kind of sustained dividend growth going forward.
JM: Stuart, looking at the portfolio, you are overweight France, Italy, and the Netherlands, while underweight Germany and Switzerland, what’s driving those regional preferences? And are they primarily a reflection of stock selection or your broader economic outlook?
SB: Absolutely. So I guess the key point to make really is that we’re very much bottom-up fundamental investors. So, when I think about our process, we’re really looking at the fundamentals of the individual businesses and sectors that we are investigating. We’re looking to find companies with attractive or improving fundamentals that kind of valuations don’t yet fully reflect. And so the country allocations really are kind of an output oof that process. But where we do think about country allocations is kind of from a risk management perspective, particularly when managing around, what we see maybe from a political economic perspective.
If I take France as an example, so as you alluded to, we are overweight France. We’ve got sort of more than 20% of the portfolio within listed French businesses. This is very much an expression of kind of our views, on those businesses and the attributes that we expect them to kind of deliver going forward, rather than a view on the French economy or French politics. And whilst French listed companies do, like I say, make up more than 20% of the portfolio, actually, French revenues are more like 7% of the portfolio. So we have highly diverse businesses, very international businesses, and companies that are able to deliver strong fundamentals sort of irrespective of the outlook within France. Clearly, we aren’t ignorant to the fact that there are politics, for example, to manage within France, or are all too aware that, there’s an election next year within France, and we do discuss that from a risk management perspective, clearly.
I guess another point to make would be that, where we do see geographic allocations, this can be a reflection of the bottom-up work that we have done, where industries and businesses might be experiencing strong or strengthening fundamentals. So we have been finding more ideas in the periphery, in recent years, Spain and Italy. And a lot of that is to do with improving market structures, for example, within financials, the banking sector, and so on which provides kind of a backdrop for companies to be able to earn better returns than they have in the past, which obviously ultimately flows through to the kind of dividend streams that we can expect going forward too.
JM: Oh, very interesting. Well, Stuart, European banks have enjoyed a much stronger backdrop in recent years. How sustainable would you think earnings and dividends are from the sector if interest rates continue to move lower?
SB: Absolutely. Well, European banks really have been a kind of success story for equity investors over the last number of years, really. I guess the backdrop in recent years really has been a picture of, I suppose, improving interest rates, but also improving market structures, which have kind of allowed banks to earn an improving ROE and seen sort of strong earnings and dividend growth. I think that environment’s been very much driven by kind of retail banks.
So for the example of Spain, we have seen a market that’s kind of consolidated there, meaningfully in recent years. The top five players went from sort of less than 50% of the market to sort of 80% in 2024, which has allowed really attractive pricing and an ability to improve net interest margins and returns. Through that period, these companies, have also had strong capital positions and valuations which were trading sort of below book value, which meant they could return a sort of attractive dividends, but sort of crucially share buybacks to investors as well. I think sort of from here, the investment case for European banks is kind of changing. And one thing I would emphasise is it’s not just about interest rates.
So on, on the interest rate piece, this is kind of one piece of the puzzle. But it’s very much not the case that, that sort of interest rates dropping sort of 25 basis points, to pick a number, would derail an otherwise very strong outlook for banks from an earnings perspective. What we see actually is that earnings drivers are kind of broadening. So we’re seeing signs of kind of volume growth, companies at the margin putting their balance sheets to work, which means kind of loans and deposits have moved into an environment of growth. You know, many of the companies that we invest in are not just about NIIs, so they have broader fee businesses, insurance, wealth management, et cetera, which, which offers another earning stream.
And lastly, AI. There is obviously a lot to debate around AI, adoption in the market more broadly. But also for the bank sector, we think the banks offer one of the clearest opportunities to adopt AI and improve cost income ratios. And that should be a sort of tailwind to earnings going forward. So we think earning, we think sort of valuations look really attractive. Earnings growth is, if anything, a bit more balanced and sustainable. And it’s not just driven by the interest rate outlook, which offers a kind of attractive total return backdrop for the bank sector from our perspective.
JM: And moving on to another sector, utilities. They’re very popular among income investors as they provide dependable cash flows. What differentiates the companies you’re backing from the rest of the sector?
SB: Absolutely. So it’s another sector that’s been through kind of quite meaningful change through long cycles. So, I guess if we think about the last decade, the sector in many ways was sort of in the doldrums, had a high proportion of its earnings exposed to power prices, less kind of recurring revenues, and so on. And now we sort of fast-forward to where we are today, you know, a materially higher proportion of sector earnings and cash flows are exposed to kind of regulated or quasi-regulated, earnings, more contracted cash flows, which gives us confidence in not just the kind of resilience of the earnings and cash flows, but also the dividends. And at the same time, an improved earnings growth outlook. So when I think about it from a kind of total return perspective, the utilities, depending on the name of a kind of say three to 5% dividend yields, earnings that we think can grow sort of mid to high single digit and in some cases higher, underpinned by a strong backdrop for electrification investments. So we think it’s a very strong, strong backdrop.
I guess within the space where we’ve tended to have a preference is for the integrated utilities, which are kind of present across the value chain. I guess, why is that? So this is companies that are very kind of diversified. They are also, generally speaking, becoming more infrastructure-like over time, investing more in electricity grids, contracted renewables, and so on. And their commodity exposure has lowered over time. But they’re also sort of exposed to or retain kind of some upside optionality. So whether that be to power demand, which is actually perhaps surprisingly been getting a bit better in Europe, incremental investment opportunities within electricity grids, batteries, and so on. And when we think about it from a kind of total return perspective, that’s a pretty attractive place to be for us.
Where we’ve been a bit less interested or more cautious are those names within the pure play kind of conventional power generation part of the sector where earning streams are kind of much more volatile, much more dependent on commodities at risk of political intervention, and they sort of lack the infrastructure-led growth angle of the investment case, which ultimately the names that we look to invest in, have in spades.
JM: Markets continue to be shaped by geopolitical developments, from trade tensions to conflicts and shifting defense spending. I know you said you were mainly bottom-up investors, but what are company management teams telling you, and how much does geopolitics influence your investment decisions?
SB: Absolutely. Markets certainly do continue to be shaped by geopolitical developments. That is very much fair to say and has been the case for quite some time. I guess on the management team point, I’m very fortunate to be part of a fantastic team within European equities. So, you know, more than 20 investors, across the market with great relationships with the management teams of the companies that we invest in. And we get a huge amount of value from our interactions with them, understanding how they think about opportunities, but also risks.
I guess one thing that we’ve found in sort of general terms throughout the year is that, you know, when we think about the Middle East crisis, feedback from management teams since then has generally been very reassuring from the perspective of, you know, little, if any, impact from a demand perspective, very little from a sort of income input cost perspective and earnings outlooks, which are generally speaking, very resilient.
And one point I would kind of make is that I think geopolitical risk has kind of gone from an occasional external risk to something that companies, and investors, are managing on a day-to-day basis and they adapt. So really, we’ve sort of gone from crisis to crisis over the last six years. We had COVID, the 2022 energy crisis, ongoing trade tensions, and now what we’re seeing in the Middle East. And companies adapt. I think one thing that’s, you know, really important to us from an investment process perspective is kind of resilience. And I think that’s ever more the case now. So understanding the kind of cyclicality, you know, the nature of recurring revenues, diversification, and how companies are kind of managing crises is a really important thing to kind of focus on.
JM: Defense has become one of the biggest investment themes in Europe over the past couple of years. How do you think about defense stocks within an income strategy? Is this an area where you’re finding opportunities or do valuations make you cautious? I know defense hasn’t been that strong in 2026. How are you feeling about it right now?
SB: Yeah, absolutely. I guess, the step change in European defense spending’s probably one of the more profound changes that we’ve seen in the European market in the last few years. So obviously at the start of last year, we saw the enhancement of kind of NATO targets. And we think from a demand perspective, that means that, you know, equipment budgets within Europe can grow, you know, in double digits for the foreseeable future. And we think that trend will remain in place, regardless of headlines that we see around ceasefires or otherwise.
I think what, as you alluded to, has been sort of really interesting is equity market kind of pricing since last year. So after, you know, what was a really strong start, to 2025 since last summer, we’ve sort of seen volatility and de-rating. I think that’s been driven by a number of things, really.
Firstly, probably sort of in places high starting multiples and expectations which had been materially upgraded. I think some kind of ongoing debates around budgets, what happens to budgets in a world if we do hopefully move towards peace and how the shape of those budgets look. So we are seeing sort of signs of shifts in priorities, whether that be towards sort of air defense, a waste to some degree from ammunition. And then some market dynamics, which I think have also played into this, in terms of other perhaps growth sectors captivating the market’s imagination. I think from an income perspective, we would say that, you know, as with any growth sector, where there are relatively low dividend deals, there is a high degree of competition for capital.
But we are a strategy that’s not just focused on dividend yield, we also focus on growth. And we have seen multiples really compress back towards levels, before the NATO announcement actually, sort of at the start of 2025. And we think there are sort of selective opportunities to do the work and find opportunities within that space where expectations have the potential sort of be exceeded and where dividend growth can be better than the market and maybe better than people have in their expectations.
JM: Looking ahead over the next 12 months, how do you see geopolitical uncertainty shaping European equity markets? Do you expect it to create more risk or more opportunities for active stock pickers?
SB: Absolutely. So, I’m absolutely sure that geopolitical uncertainty will continue to be a feature. I guess, you know, the list of things that markets and companies have to deal with is quite, quite long and is often presented as a risk, whether that be the AI race itself, ongoing conflicts, trade policy, you know, an evolving relationship between the US and Europe, and that’s kind of before we get onto, you know, a busy political calendar within Europe over the next 12 months in terms of elections. I think one point I would kind of make is that, you know, geopolitics is often referred to as a risk, but it can very much present an opportunity. So, firstly, geopolitic can present buying opportunities in companies that we really like that are sold off.
Unduly we’ve taken advantage of a number of these opportunities, whether that be around Liberation Day last year or some of the concerns around the [Strait of] Hormuz crisis, this year. But secondly, geopolitics does change, the outlook for investments. So particularly from a kind of CapEx perspective, we do see signs of kind of trade tensions driving supply chain investments, where companies want to kind of reassure or solidify their supply chains. And more recently, obviously, energy security. I mean, we’ve had the second energy crisis in five years within Europe, and this is a kind of wake-up call for investments across energy infrastructure, utilities, CapEx, and the associated supply chain. So, yes, we will continue to deal with geopolitics, but it’s something that we and companies are increasingly used to, and it, this will very much present some opportunities for us going forward.
JM: Finally, what’s one thing you think investors are underestimating about European equities or about income investing in the region?
SB: Absolutely. So if I was to pick out one thing that I think is kind of under-appreciated, it’s probably the changing shape of the total return equation in Europe. So, you know, there’s obviously a perception to some extent with good reason that Europe is a kind of cyclical asset class with an attractive dividend yield, but struggles outside of that. And I think the Middle East crisis has, to some extent, furthered that perception and that sentiment. But we think, you know, the reality is much more nuanced.
So, you know, whilst there are challenges out there, whether that be on the consumer side with companies like consumer staples, facing more competition and lower growth, whether that be on the more cyclical side with automotive manufacturers and chemicals companies, for example, facing structural challenges, for example, from Chinese competition.
We are active investors. We take active decisions not to own things. And in the sort of background in recent years, we have seen the sort of meaningful improvement in the structural earnings growth outlook for a number of industries and companies, whether that be sort of technology and industrials, financials, and utilities. So kind of what that means is we think, you know, the dividend growth outlook, is improving on a structural basis.
And another point to make is that, you know, in recent years, I think European companies, particularly since COVID, have kind of increasingly used share buybacks as a tool to return, capital to shareholders. That kind of started as a sort of trickle in a relatively small number of companies and industries pre-COVID. And since then, that has really broadened out across multiple different industries.
So I guess the key points that I make are really, we think that sort of total return equation in Europe is changing. The market continues to have an attractive dividend yield, but we do see signs of earnings growth becoming more attractive and as a result, dividend growth, and an increasingly sort of shareholder-friendly approach to additional capital returns.
JM: Thank you, Stuart for your time. Have a wonderful rest of the week.
SB: It’s been a pleasure. Thank you very much.
SW: This is a core European income fund that invests mostly in large and mid-cap companies in continental Europe. The managers’ active investment skills have been the key to this fund delivering reliable, growing income without sacrificing long-term capital appreciation. To learn more about the BlackRock Continental European Income fund please visit fundcalibre.com
