Is it time to be positive about European equities?

Staci West 24/03/2023

Despite a rough few weeks for the stock market, Alistair Wittet, co-manager of Comgest Growth Europe ex UK fund, gives us a few positive points on European markets at the start of the year . He expects a lighter than expected recession on the continent – if indeed there is one – and one of the best earnings years to date for companies held in the portfolio. Alistair explains why, rather than try and predict what could change in the future, it’s best for investors to focus on what doesn’t change. He also discusses the opportunities brought about by an ageing population, digitisation, decarbonisation and healthcare giving examples throughout the portfolio.

Note: This interview was pre-recorded on 21 March 2023

I’m Staci West, and I’m joined today by Alistair Wittet, co-manager of Comgest Growth Europe ex UK fund. Alistair, thanks for joining me today.

[00:10] It’s a pleasure. Thank you for having me.

Now, Europe had a more positive start to 2023 when compared to the previous year. So, why was this, what happened, and do you expect this positivity to continue?

[00:25] Yeah, so, I think the context is important. 2022 was a tough year for markets generally. And 2023 has seen a bit of a rebound. The main drivers of that, I would say, are twofold. First of all, inflation expectations have come down a little bit. So, one of the big fears of 2022 was the inflationary environment and the early data at the start of the year was quite reassuring on that, with inflation starting to come down. And, of course, that leads to a more optimistic view on the path for interest rates as well. So, I think that’s the first point. 

And the second point is – and maybe in some way related – a slightly more optimistic view on the economy. So, previously we’d been expecting a recession in 2023; if we do have one, it’ll likely be a lot lighter than originally expected. And so, all of this led to a certain amount of optimism in the market. 

Now, of course, the question is, is this justified? And is it likely to continue? And I think events of the last few days and weeks have shown that the system is, to a degree, fragile; that the recovery is also fragile; and that it is not at all immune from an external event, which may result in a more difficult environment, either inflationary, either interest rates or economically. So, I think it’s a little bit maybe too early to cry victory on that.

How are sales and earnings and profits holding up generally and maybe among some of your companies specifically?

[02:02] So, 2022 was a challenging year for companies in general. A highly inflationary environment that companies had to deal with. Now, it was a benefit for some parts of the economy – think of oil and gas companies who saw record profits last year. I can think also of sectors like the auto industry where supply chain constraints meant that for the first time in a long time, these companies had pricing power and they saw that feed down to strong margins in that year as well. So, I think it was a strong year for market earnings generally, and for the portfolio also, but for very different reasons. The portfolio benefited less from the inflationary commodity prices. Indeed, for many of the companies, it was more of a challenge that they had to deal with, but that they dealt with very well, thanks to their pricing power.

And so, 2022, we saw a year where we think earnings would’ve grown – we’re in the middle of result season – but we think earnings would’ve grown something like 15-20% that year, which is actually one of the best years on record, so, it’s been a very strong year. 

Now the question, of course is what about 2023? And I think that’s where we’re going to probably see quite a big differentiation between companies because the factors that helped much of the economy – I’m thinking of oil and gas companies, I’m thinking of auto companies, raw material producers – those factors are no longer a tailwind in 2023. If anything, these prices are starting to roll off. So, that is why for the market in general, earnings are actually expected to barely grow in 2023. 

Now for the portfolio, we actually expect another strong year of growth. We’re expecting 10-15% earnings growth, and that’s for factors that maybe we’ll come on to later. But many of the companies in the portfolio are generating growth, not thanks to these temporary factors that we saw in 2022, but because of structural factors that they’re benefiting from.

And Congest said recently that “rather try and predict what could change in the future, it’s best for investors to focus on what doesn’t change”. Can you just elaborate a bit more on this? What do you mean? And maybe an example if you can.

[04:12] Yeah. So, I think what we are looking to do is find businesses that have a growth that is in some way idiosyncratic, that is not dependent on either a certain economy or a certain economic outlook or a certain inflationary outlook. And so, what we’re looking for are companies that have structural tailwinds which are unlikely to change regardless of the environment. So, what sort of tailwinds are we talking about? Well, aging populations; this is an inevitable reality of the next decade, and it has been indeed for a number of decades already. That will likely result in increasing healthcare spending. And there are companies that can provide solutions, [companies] that are going to benefit from that. 

IT spending is likely to continue to grow. The world has seen a massive shift in digitisation over the last three years. Companies across the board, partly because of Covid, realise that they had a massively underinvested IT infrastructure, and they’re upgrading those at the moment. That is likely to continue. 

And then maybe a third one that’s very likely to continue is the environmental transition. We have a reality that we need to decarbonise our economies and there are a number of companies that will benefit from that decarbonisation trend. So, I’d say those are three big trends that are very unlikely to change over the next decade. And there are a number of businesses that are very nicely exposed to those factors.

And then, maybe if we can just end with an example or two from the portfolio? So, something that you find interesting or maybe tapping into one of those themes that you just mentioned?

[05:53] Yeah, so I can give a few examples, and I’ll maybe dig into one of them in a bit more detail. But if we take the decarbonisation theme, for example. There are companies that provide solutions that will help their customers decarbonise. So, I’m thinking of a company like Sika [Sika AG], for example, in Switzerland which provides ingredients used to make cement. Cement is, or the construction industry is one of the most polluting industries in the world, and cement is a core part of that. And this solution reduces the carbon intensity of cement production by around 40%. So, this is going to be a really important way that their customers are going to decarbonise. So, that’s an example in the environmental space. 

In the tech space, there are a number of companies, whether they’re software companies like ASML [ASML Holding N.V.] producing machines used to make [micro] chips. Companies like Accenture, which is everywhere, helping their customers conduct those, you know, go through those digital transformations. So, in the digital space, I think that’s going to be important. 

And then maybe finally in the healthcare space, you know, one company that we have a big exposure to is Novo Nordisk. It’s a leader in the diabetes space. It’s been providing diabetes solutions for now a century, and more recently they have opened up a whole new market that we think will be a very exciting for this company, which is the obesity market. 

So, obesity is a major problem for all countries around the world. It is a condition that has grown exponentially over the last few years, and it is costing healthcare systems substantially, not just to treat obesity itself, but all the secondary effects of obesity. Obesity is the root cause of so many other diseases, whether they’re cardiovascular, whether they’re diabetes. So, it is a real priority for health systems. And Nova Nordisk has, just two years ago, received approval for a very innovative product that can help treat obesity. So, we think this will be a very important growth driver for this company, not just for the next year or two, but probably for the next decade.

Alistair, thank you for those examples, they were great. If you’d like more information on the Comgest Growth Europe ex UK fund, please visit

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