By Thomas Hodges
Proclaiming you are bullish about the long-term case for European equities is likely to earn you some strange looks at present.
Sentiment towards European equity funds has capitulated. Net flows are approaching the levels last seen amidst the sovereign debt crisis a decade ago. European equities now trade well below their 10-year average forward price-to-earnings. The war in Ukraine rages on to our continued shock and horror. However, we remain bullish.
This is the richest opportunity set we have ever had access to. We are witnessing the emergence of disruptive, high growth technology-enabled companies, industrial companies capable of consolidating fragmented markets, decarbonisation-linked climate champions, high quality consumer franchises and even a growing biotech industry. These are companies with structural growth tailwinds that, largely, will progress independently of the macroeconomic climate.
One of the great sources of excitement for us has been the development of the European technology ecosystem. It has been our view that with the increased levels of funding and support available to Europe’s technology-enabled firms, more and more would make it to the public markets, thereby causing a steady transformation of the opportunity set year after year.
Just last year, 100 new tech-enabled unicorns – privately held start-up firms valued at more than $1 billion – were minted in Europe. The economic environment is obviously changing and the sentiment towards private companies feels very much like when Sequoia Capital issued their now infamous “R.I.P. Good Times” presentation in 2008.
The funding environment will become tougher for these companies, but this is healthy. It will prompt competitive shake-outs, allowing the winners to emerge stronger.
It will also encourage greater resilience. This extends to the consumer-related digital platforms we own in our portfolios. While some companies may go away, the ecosystem itself will be healthier. The fact start-up clusters have become so established in Stockholm, Amsterdam, Berlin and elsewhere, supported by a growing venture capital presence, gives us confidence that Europe’s technology-led transformation will continue well into the future.
An additional area that is contributing to our bullishness on Europe’s future is decarbonisation. We think Europe can be a disproportionate beneficiary of what will likely be one of the defining growth trends of the next decades. Europe has the institutional willpower and the industrial and engineering know-how to be a leader in this area.
We have hitherto focused more of our attention on finding companies providing the infrastructure layer, such as Nexans, but there are a number of companies in Europe that will be crucial in the production and distribution of renewable energy for years to come.
The growth opportunity is set to become more evident much sooner than many might have thought, with the ongoing war in Ukraine causing governments to pull forward their plans on renewables and energy efficiency. The European Commission has even announced its intention to make the European Union energy independent by 2030. We believe this will be a rich source of outliers that drive returns in the years to come.
Beyond these exciting new, and sometimes adapting, sources of outliers, Europe continues to have clusters of excellence that produce genuine long-term growth opportunities. These opportunities often go unrecognised, particularly those niche industrial companies that have the potential to consolidate fragmented markets.
For those investors willing to cast aside their biases and preconceived notions about Europe, they will find a broad opportunity set and one that is trading at a cheap multiple.
Thomas Hodges is investment specialist, European equities, at Baillie Gifford.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here