Luxury in flux but brands still booming
This article first appeared in Professional Adviser on 13 February 2024 It’s not often you see ...
I’m a big horse racing fan and I always remember a horse called Sizing Europe, which was always there or thereabouts in the big races. For one reason or another I never quite took to him. Despite everything pointing to his quality, I let sentiment get in the way and missed the boat by not backing him when he won one of the biggest races of the season in 2010 – the Queen Mother Champion Chase.
That’s precisely how many have felt about investing in Europe generally in recent times. The region has been out of favour for some years, as it was slow to recover from the global financial crisis and then Brexit reared its ugly head. There always seems to be a reason not to invest but the continent’s stock market keeps on plugging away and the average European equity fund has produced annualised returns just shy of 8% over the past decade, while the average European smaller companies fund has returned 10% per annum*.
While Brexit is now a done deal, there are plenty of wrinkles to be ironed out still and arguments across the channel continue. First it was about fish, now it’s about vaccines.
The European economy shrank by 6.4% last year – far less than the 10% fall we saw here in the UK** – but with less than 12% of the EU’s population reported to have received their first Coronavirus jab (compared with 40% here)***, Europe has been slow off the mark in the vaccine rollout.
However, David Walton, co-manager of Marlborough European Multi Cap, said recently that initial company reports have generally given a positive outlook for 2021 following a better finish to 2020. “Ongoing government support and pent up excess consumer savings should further help to improve both consumer sentiment and business confidence throughout the year,” he commented. “The ongoing lockdowns and rather slow covid vaccine rollout are reasons for caution, and the main risk is a slower than expected recovery in 2021, but this recovery should come through.”
One fact that is often forgotten by investors is that Europe is home to many quality companies – global leaders in their fields. There is an abundance of luxury goods companies, for example, which could benefit from pent-up consumer demand, particularly from emerging markets, as global economies re-open. The region is not dependent on its own economic fortunes to succeed.
It is also home to many thousands of large, medium and small companies from many different countries and sectors, so the choice for investors is huge.
Niall Gallagher, manager of GAM Star Continental European Equity, commented: “Europe leads the world in a few sectors, including luxury goods and green technology. Some of these companies also have the added benefit of providing investors access to emerging market growth but with developed market governance, environment and social codes and cost of capital.
“I’m optimistic about a rebound in European economies this year. Eventually, the pent up demand for tourism, air travel, hospitality and autos will be unleashed, and demand could very well outstrip supply pushing prices and company margins higher.”
For those wanting exposure to European equities, here are three funds to consider:
The manager of this fund describes his process as being governed by early indication of industry or sector themes that will still be around a decade from now. “This allows us to ignore macro-driven fear and optimism that fills newspapers and focus on what matters,” he says.
The managers of this fund believe that only a third of European companies are run for shareholders. They avoid weaker businesses with poor corporate governance and instead focus on finding companies with five key attributes; aligned interests, earnings visibility, pricing power, cash generation and return on capital.
Co-manager Chris Garsten recorded this video interview with FundCalibre recently:
This fund invests in a portfolio of predominantly large-cap European equities. It has a distinctive process, developed over a number of years, that focuses on industry structure and a company’s competitive position. Firms that can defend their margins and industries with barriers to entry are preferred.
*Source: FE Analytics, 10 year annualised returns, in sterling, 26 Mar 2011 to 19 Mar 2021
**Source: International Monetary Fund, Eurostat, January and February 2021
***Source: Our World In Data, 22 March 2021