Why European equities offer attractive opportunities today

Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Mark Nichols, manager of the Elite Rated Jupiter European fund. Mark, thank you for joining us today.

[00:10] Hi, Chris.

Let’s go straight into it. Europe has somewhat been overshadowed by what’s going on in the UK and the US at the moment. Could you maybe give the viewers a sort of snapshot of the economic environment in Europe today, and maybe talk to us through what European stock prices have been doing, they’ve been doing quite well. Give us a bit of an insight into that as well, please.

[00:32] Yeah, so, we think it’s quite important that you separate the underlying European economic developments from what’s happening in the European equity markets.

When we look at the underlying revenues that are generated from an index like the MSCI Europe, for example, less than half of those revenues are actually derived from Europe. So, with that in mind, it’s been a bit of a mixed picture for European equity markets – outperforming the US counterpart over a one-year horizon and a two-year horizon, but still sitting on significant underperformance over the long time periods going out beyond the last decade.

When we look at the underlying economic performance of the two regions, we genuinely don’t see a huge amount of difference. If we look at GDP growth forecasts going into 2024, all markets in Europe and the US are expected to grow at around about 1%. That’s well below long-term averages and recent trend growth as well. When we look at inflation headline rates falling in both regions, central banks have been tightening in both regions, unemployment remains around long-term lows in both regions. So, we see a relatively low growth, benign backdrop in Europe. And we see a pretty similar one, if we’re being frank, in the US at the moment.

Okay. You mentioned recently that, while all eyes have been on US tech stocks, actually your top holdings have delivered better revenue growth. Could you maybe go into a bit more detail on that as well, please?

[02;14] So, the market likes to call the US big tech names the Magnificent Seven* at the moment. So, its names we’re all familiar with; the likes of Apple [Inc.] and Google [Alphabet, Inc.] for example. We looked at those Magnificent Seven and their revenue forecasts, and we compared it to the top seven holdings we’ve got in the European fund. And I guess, not maybe a big surprise to us, but it might be a surprise to others, our names had higher forecast revenue growth than the US Magnificent Seven and traded at significant discount. And to give that a bit of a context, the Magnificent Seven – at the end of July – were trading on an average P/E** multiple of 36 times, and our top seven holdings – those with faster revenue growth – trading on average forecast P/E multiple of 25 times. So, 11 point gap between the two and the European names growing faster, trading less expensively.

Is that just a sentiment thing that comes into it? Is that what it is then with Europe? I mean, I remember one of your colleagues telling us that there’s always something going wrong with Europe. You have to sort of look past that and see the fact that these companies are growing, they are global.

[03:26] Well, I think when you look at the scale of the US equity market, when you look at its weighting in global equity indices – so, more than half the world’s equity value is sitting in the US – it’s impossible for anyone to ignore it. Everyone’s got a view on US equities. By contrast, Europe can be forgotten, it can be ignored, and that is exactly what creates opportunities for equity investors and particularly for people like us that are prepared to get in the weeds and look at the individual stocks, the individual names, and understand what the opportunity is that’s unique to that name, rather than having to think in these broadbrush terms about which market may or may not look more attractive than which other market.

Okay. I just want to turn to the underlying nature of the portfolio. Obviously you’ve got a decent allocation in France and also in Dutch companies. Could you maybe explain, I mean, they’re almost accounting for half the portfolio. Maybe just talk us through, is it purely stock specific or is there something to those two countries that perhaps makes them more attractive in this environment?

[04:31] I think in answer to your question, to be completely fair, we pick stocks and quite often the country weightings or the sector weightings are, if not complete accident, at least they are just an outcome of the stock selection.

When we look at specifically the Dutch or the French-listed names that we’re holding, the only things I think you could say that they have in common with one another are they’re exploiting niche growth opportunities on a global basis across that whole collection of names. They tend to be market leaders in terms of profitability, cashflow generation, returns, all those good things that we would look for in a long-term holding. And, I think, probably the one factor that we look at that’s important to us that I would pick out is the idea of a network effect. So, buying companies that have a product or service that, when it’s sold to their customers, becomes hard to displace and becomes more valuable to the customer the more customers use it.

So, for example, in the Dutch market, we own the world’s leading specialty chemical distributor, a company called IMCD [N.V.]. The more customers that IMCD signs up, the more chemical manufacturers need to use that distribution network to access the customer base. The more manufacturers are signed up, the more attractive the company becomes to the customers, and you can see how that becomes a nice virtuous circle or a positive network effect over time.

Mark, thank you very much for joining us today.

[06:08] Thank you.

And if you’d like to learn more about the Jupiter European fund, please visit FundCalibre.com.

*The Magnificent Seven comprise Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla

**What the market is willing to pay today for a stock based on its past or future earnings.