The case for European Equities

Longer term equity returns are primarily driven by real dividend growth, not economic growth. And what I still find amazing about the continental European equity space is that two-thirds of revenue comes from outside the region. The rest of the world remains an eager buyer of European goods and services. Which in many cases are best in class, competing against international peers on the global stage. Think of a company like LVMH, which has arguably benefitted just as much from the rise of China as many Chinese domestic names. Or Novo Nordisk, which continues to ride the wave of the anti-obesity drug boom in the US and international markets broadly.    

Furthermore, as stock pickers, we can be selective about the European companies we hold. In continental Europe, the average quality of companies is roughly the same as in the US, but the dispersion between the lowest and highest quality firms is far greater. Europe also looks attractive in terms of long-term valuations; in contrast the US looks expensive even when excluding the big tech names. The fluctuations in the best regional performers we have seen over recent decades (Japan in the 80s, America in the 90s, China and EMs in the 00s and the US again over the last 10+ years) could be an argument for reducing US exposure and allocating to more attractively valued regions.  

Our long-standing investment philosophy remains unchanged. We look beyond the economic and political noise to find high quality, sustainable dividend growers, across all sectors of the European market.  

Our near-term outlook is more cautious, given factors like an inverting yield curve (when the interest rate on long-term bonds is lower than the interest rate on short-term bonds) – a traditional harbinger of recession, albeit with unpredictable timing  as well as onerous refinancing requirements for consumers and businesses. Western economies remain highly dependent on consumer spending, with some signs of strain, particularly for lower end consumers. Though we have seen signs of easing inflation across major markets and rate cuts from central banks recently, we still consider pricing power a crucial factor when selecting stocks.  

With these challenges and geopolitical uncertainty persisting, we are sticking to our tried and tested formula of picking stocks that we consider having limited downside. We always remain fully invested, as markets should rise over time. Any volatility we do see caused by macroeconomics / politics can present good buying opportunities for stocks we either already hold or are interested in acquiring. 

Europe continues to offer a fantastic range of investment opportunities across different industries. This gives us the opportunity to continue aiming to deliver long-term outperformance versus not just the benchmark, but other regions as well.