Four areas catching attention in Europe

From artificial intelligence and data centres to healthcare innovation and defence, Marcel Stötzel, Portfolio Manager of Fidelity European Trust PLC recently spoke to Morningstar to explore why Europe’s stock markets could offer opportunities that extend far beyond the region’s economic outlook.

Slower economic growth, political uncertainty and pressure on public finances have all weighed on perceptions of Europe. But for investors, focusing solely on the European economy risks overlooking a much broader opportunity.

Many of Europe’s leading companies operate globally, giving investors exposure to some of the most important long-term trends shaping markets today. At the same time, valuations look attractive compared with similar businesses listed in the US.

For Marcel Stötzel, Portfolio Manager of Fidelity European Trust PLC, that combination is creating compelling opportunities across the market.

Looking beyond the European economy

One of the most important distinctions for investors is between the European economy and the European stock market.

Only around a third of MSCI Europe’s revenues come from Europe itself, which means the fortunes of many European-listed businesses are driven as much by global trends as by what happens closer to home.

Europe is home to companies that compete internationally, and finding businesses capable of competing with the best companies in the world remains central to the investment approach.

Looking at valuations, the gap between some comparable US and European-listed companies has become unusually wide. At the same time, parts of Europe’s domestic economy could benefit from increased spending, particularly in areas such as defence and infrastructure.

Against this backdrop, where is the team finding opportunities?

AI: Looking beyond the obvious winners

Artificial intelligence has largely been associated with the US technology giants and semiconductor businesses. Europe has fewer companies developing the leading AI models, but that doesn’t mean it will be left behind and there are opportunities emerging at several different levels.

ASML, for example, plays an important role in the global semiconductor supply chain. Its extreme ultraviolet lithography machines are required to manufacture leading-edge semiconductors, and the company’s strong competitive position gives it significant pricing power.

But Marcel believes the next phase of the AI opportunity could increasingly extend beyond the companies building the technology to the businesses using it. Europe’s large financial, industrial and healthcare sectors could benefit as AI is deployed to automate workflows, improve productivity and enhance decision-making.

Banks are one example. Complex and labour-intensive activities such as customer verification and onboarding, compliance, and internal operations could potentially be streamlined using AI, helping businesses lower costs and improve returns. Marcel believes similar opportunities could emerge in utilities and pharmaceuticals.

For investors, Europe’s AI opportunity could therefore prove much broader than simply finding the region’s answer to the US technology giants.

Data centres and the growing demand for power

The rapid development of AI is also increasing demand for the infrastructure needed to support it.

Schneider Electric provides one example. The company supplies equipment and infrastructure for data centres and electrical grids, two areas Marcel believes are becoming increasingly connected.

As data centres consume more electricity, power demand is increasing at a time when much of the existing grid infrastructure is ageing and requires investment.

This creates a potentially powerful combination: investment is needed not only in the data centres enabling the growth of AI, but also in the electricity networks required to power them. Schneider Electric is particularly well placed because it has exposure to both sides of that equation.

Being selective in healthcare

Healthcare is another area where Marcel is finding opportunities, although he believes selectivity is increasingly important. Developing successful new medicines has become more challenging, with research and development productivity across the pharmaceutical industry coming under pressure.

Against that backdrop, Roche - a multinational healthcare company - stands out. He believes the company continues to demonstrate a relatively strong drug discovery pipeline, while its work incorporating AI into research could potentially support future innovation.

The position illustrates an important part of the trust’s approach - rather than simply seeking exposure to an attractive industry or theme, the team looks for individual businesses where they believe the long-term fundamentals are strongest.

Europe’s changing defence landscape

Defence is another area attracting increasing attention.

Higher European defence spending could create a long-term opportunity for parts of the industry, but Marcel remains selective. Defence companies have historically struggled to meet the trust’s criteria for profitability, cash generation and sustainable dividend growth, while the sharp rally in share prices initially left valuations looking expensive. More recently, a pullback across the sector has created more attractive entry points, even as the longer-term outlook for defence spending remains positive.

One company the team has recently invested in is German defence electronics specialist Hensoldt. Marcel has particular confidence in Germany’s spending commitments, given its financial capacity and determination to rebuild its defence capabilities. Hensoldt is also exposed to some of the fastest-growing areas of defence technology, including radar, drone detection and electronic warfare. These capabilities are becoming increasingly important as modern conflicts highlight the need for more sophisticated and cost-effective defence systems.

With a strong position in these areas, good visibility over future orders and a more reasonable valuation following the sector's correction, Marcel believes Hensoldt offers an attractive way to participate in Europe's changing defence landscape.

Looking beyond the headlines

Europe still faces economic and political challenges. But those challenges don’t necessarily tell investors the whole story about its stock markets.

Many European-listed businesses generate much of their revenue elsewhere in the world, while others stand to benefit from structural changes taking place closer to home.

From the semiconductor technology behind AI and the infrastructure powering data centres to drug discovery and defence electronics, Marcel is seeing opportunities in companies exposed to trends that could play out over many years.

And with valuations in parts of the European market looking increasingly attractive, he believes investors may be getting some of those long-term growth characteristics at prices that have become harder to find elsewhere.

For Fidelity European Trust PLC, that creates a broad hunting ground for companies with strong fundamentals, sustainable cash generation, and the potential to grow over the long term, while remaining disciplined on the price paid.

Watch Marcel’s interview with Morningstar

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