European outlook: four megathemes
Mark Heslop and Mark Nichols, Fund Managers, European Growth, look beyond 2022, considering some of the longer-term trends that are likely to impact investment performance.
When we think about the big picture, we tend to look further ahead than the next quarter or even the next year. The most important considerations when selecting companies in which to invest can be extremely varied from one opportunity to the next. They are not captured in a view of near-term interest rate policy or ongoing geopolitical shenanigans. Rather, we focus our thoughts on how the economic landscape might change over the next five, ten or even 20 years. When we talk about the macroeconomic backdrop, we are generally referring to broad structural trends (such as demographic changes or technological disruption) and how these will impact companies in our investment universe. Among the important questions we are seeking answers to are: which companies are best placed to access the structural growth trends we identify, and which can do so without sacrificing price?
The structural growth trends that are prominent in our current thinking, coalesce to form our outlook. Here are four themes that play a key role in our thinking, as we look forward, not only to 2022, but to the years and decades ahead.
Emissions
Carbon emissions are a double-edged sword. On the one hand, increasing consumer and political focus on climate change is driving up the cost of business for carbon-intensive companies both in terms of tightening regulatory compliance and the relative cost of finance. A potential consumer backlash against non-compliant businesses is also a threat. On the other hand, getting to ‘net zero’ requires a huge amount of investment, a re-engineering of multiple industries and infrastructure, and an enormous opportunity for the solution providers. Europe has some world-leading companies and technologies that have significant potential for growth.
Dassault Systemes, for example, is a leader in design and product life cycle management software. As its customer industries (such as automotive, aerospace, packaging, and construction) seek to improve the energy efficiency of their products, Dassault’s solutions will be critical to fast and cost efficient time to market. Consider the shift from the internal combustion engine to electric vehicles in the automotive industry. Changing the power source for a car dramatically alters the overall weight and handling of the vehicle, and this requires the manufacturer to design the new vehicles using different materials to achieve the same (or better) performance and safety characteristics. Dassault is a key enabler of this technological transition.
Inefficient buildings are a key contributor to greenhouse gas emissions, so we expect a multi-year acceleration in building renovation to drive demand for energy efficient building materials. Kingspan’s modern insulation materials or Somfy’s automated blinds and awnings are examples of two solutions that are likely to be in high demand.
That said, not all green solution companies will turn out to be great investments. As with all technology, picking the long-term winner is not straightforward: some may lack investment or talent, while others may simply be commoditised and fail to deliver the anticipated returns.
Digitalisation
Digitalisation is not a new trend but there are multiple drivers that give us confidence that there are further opportunities ahead. Digital solutions for both consumers and industries drive better user experiences and greater efficiencies. This is true in retail, medicine, banking, indeed almost every sector. The challenge for even deeper penetration by digital solutions is speed and computing power. With the advent of 5G (and 6G just around the corner), continuous chip shrinkage, artificial intelligence, augmented reality, autonomous vehicles and an internet of things are now viable. But a substantial ramp up in semiconductor chip manufacturing is necessary to meet the insatiable demand for these digital solutions. Coupled with a growing desire by the West for technological sovereignty, this augurs well for the semiconductor equipment industry. With companies such as ASML, Atlas Copco, VAT Group and Comet Group, Europe is well positioned to become a strong beneficiary of this trend.
Ageing populations
Populations around the world are ageing. This is a good thing for the individual but a challenge for society. Healthcare costs are already a challenge in developed markets, labour markets are shrinking and consumption patterns are changing. As with the other themes, there will be winners and losers from these trends. Unless health budgets can be brought under control the biggest loser may be the taxpayer.
Personalised medicine and broader diagnostic testing will help drive greater efficiency in our healthcare systems. Complex biopharmaceutical drugs have materially improved patient outcomes over the last decade and are likely to continue to see significant further growth over the next. Identifying which will be the next big drug is difficult but equipment and service companies like Lonza or Sartorius will surely benefit.
Productivity
Demographics are fairly predictable, shaped by wealth creation and falling birth rates. Around the world, the consequence of these trends is rising wages, a rising cost of living and ever greater demand for corporate productivity gains. Or, to put it another way, as labour costs continue to rise, there is a perpetual incentive for companies to try to reduce costs. In times of faster growth, higher productivity should free up cash that can be reinvested to capture a greater share of growth. In a tougher economic environment, costs become a greater focus, as businesses scramble to protect their balance sheets and service their debt. Temenos, the Swiss provider of software to the banking industry, is a good example of this, offering solutions that lower the operating costs of its customers while enhancing their competitive positioning and improving their ability to meet the growing regulatory burden on the industry.
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The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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