The European equities equation: quality, growth, diversification
Mark Nichols and Mark Heslop discuss high-quality, cash-generative, growth companies in Europe and why these stocks offer diversification potential for global investors.
We think Europe offers diversification opportunities for investors, with a range of leading global companies across consumer and luxury, industrials, health care and technology.
This is particularly true when compared with the US market which is dominated by the ‘Magnificent seven’ large-cap tech companies. In addition Europe continues to trade at attractive relative valuations.
Moats and pricing
As stock pickers, we look for European companies that are global leaders in their sectors with differentiated products and economic moats that provide pricing power. These businesses generate high and sustainable returns and invest excess cash in long-term growth opportunities and in maintaining their competitive advantages.
We see many opportunities in European listed companies that have access to structural growth trends that transcend business cycles. These trends include electrification of global infrastructure, the green economy, digitalisation and the need for computing power and health care innovation.
Electrical and digital
For example, Scheider Electric is a French-listed and global leader in low and medium voltage electrical products, used for energy management and industrial automation. It is benefitting from demand for infrastructure electrification, improved energy efficiency and growth in data centres, (with sales of equipment used in data centres growing by 20% a year).
Supplying chipmakers
In technology, we would highlight three European companies that are leaders in their respective specialties, and we believe are well-placed to benefit from growing semiconductor demand and increasing chip complexity for applications such as AI. ASML produces lithography machines used to create the ever-shrinking chip designs; VAT Group makes vacuum valves that are critical to maintaining the integrity of the clean manufacturing environment needed for chip production. ASM sells the pivotal deposition technology that will enable next generation chip manufacturing.
Health care innovation
Two lesser known health-care companies that we like are Lonza and Sartorius Stedim. Lonza is a Swiss-based global leader in contract development and manufacturing for complex biopharmaceuticals and is benefitting from outsourcing trends in the industry. It has technological breadth and global scale that makes it a partner of choice for both small biotech and large pharmaceutical customers.
Sartorius Stedim is a French-listed, global leader in the provision of manufacturing equipment for the highly regulated biopharmaceutical industry. Its products are used throughout the life cycle of a drug, giving it sticky revenues and good growth opportunities.
Supportive backdrop
Nevertheless, we are optimistic. While European equities haven’t matched US performance since Covid, the returns have been healthy, including +16% last year for the FTSE World Europe ex-UK index. We believe that a normalising demand environment and compelling valuations will provide a supportive backdrop for earnings growth and shareholder returns.
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