European equity markets have proved resilient so far this year, delivering positive returns - despite bouts of volatility. With volatility continuing into September amid concerns over the health of the global economy, central bank moves and geopolitical tensions, the Fed’s recent 50 basis points cut and China’s recent stimulus have provided some relief for investors.
Although the macroeconomic backdrop for Europe can give cause for some pessimism, it is important to recognise that two-thirds of European company revenues comes from outside of Europe. In this context, European equity market returns are not simply a proxy for domestic economies and can deliver attractive returns for investors, even if macroeconomic conditions across the region are challenged. Selectivity will, however, remain key.
Balanced exposure across high quality businesses
Our long-standing investment philosophy remains unchanged. We aim to look beyond the economic and political noise to find high quality European companies with a defensive tilt. Our focus is on firms that we believe can deliver sustainable dividend growth, as history shows us that this characteristic is a marker of quality that can help to identify stocks likely to perform across different market conditions. In this way, we seek to build a balanced portfolio and look for the best companies across sectors, favouring stocks with strong balance sheets, pricing power and a robust competitive position.
The portfolio remains balanced across sectors, but we have, however, started to cautiously increase our exposure to selected companies that have performed poorly recently and now look particularly attractive. This includes companies where we see strong pricing power and balance sheets, which should make them relatively resilient to a weaker economic backdrop. Conversely, we are wary of companies that have historically demonstrated limited pricing power and are therefore more exposed to margin pressure, as well as those that are overly leveraged.
In terms of individual names, we have increased our exposure to Ryanair, Europe's largest low-cost airline, on recent weakness. Ryanair has excelled post-pandemic, benefiting from its unrivalled cost discipline and a new dividend policy, underpinned by a secure balance sheet and strong cash generation. We believe the company is well positioned to maintain its market leadership.
Another name that we have been selectively adding to is luxury goods company LVMH Moët Hennessy. In the last few years, there has been a continued focus on the improvement of production methods and the development of digital activities. The high-quality brands and favourable supply/demand dynamics ensure that LVMH has strong pricing power. We continue to hold the view that the company is a long-term winner in various luxury categories.
Navigating uncertain markets
Although markets have recovered from recent bouts of volatility seen over the summer months, the upcoming US elections in November and subsequent effects on fiscal policy and interest rates adds a further layer of uncertainty. The last mile of the fight against inflation could be particularly tough in Europe, with services inflation remaining stubbornly high, while economic activity falls below trend.
Given this backdrop, predicting future macroeconomic outcomes for the year ahead will be even harder than usual. In this context, we will continue to spend our time focusing on analysing the fortunes of individual companies - drawing on our expertise in fundamental analysis - alert to any opportunities that could arise from further broad-based market volatility.
Looking ahead, we remain confident that our portfolios are well positioned to navigate what lies ahead and our overarching approach is unchanged - looking for well-funded and cash generative companies which can grow their dividends consistently.
We continue to seek new opportunities to add to the portfolio at the right price and remain confident in those names we currently hold.
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