Ben Ritchie: Investing in Europe remains an attractive proposition
With June marking the start of the European Championships, Ben Ritchie, head of European equities at Aberdeen Standard Investments (ASI), discusses why investing in Europe remains an attractive proposition, opportunities available and the outlook for the rest of 2021.
Asset management – like football– has seen time-horizons compress year after year. Markets are increasingly obsessed with the next quarterly earnings numbers. The focus has moved from long-term growth to short-term returns. Average fund turnover has increased – coinciding with average fund returns falling.
Such short-termism can often hinder success and instead investors should be looking for investments that build for long-term success. At Aberdeen Standard Investments the European equities team searches for companies with strong long-term growth prospects, attractive financial characteristics and business models that can endure both competition and the cycle. We also look for companies operating in industries with appealing economic dynamics, that have strong balance sheets, excellent management and strong control of ESG risks.
This strategy ensures a concentrated portfolio of investments in the best companies we can find in Europe, at valuations that imply attractive long-term returns. Our philosophy is all about bottom up stock picking, utilising our detailed fundamental research, embedding ESG considerations, taking a long-term view and acting as owners of real businesses.
The Aberdeen Standard Investments strong research base comprehensively covers large cap and small cap companies across Europe, allowing for a very broad base of idea generation as well as providing the detailed investment insight that can support high conviction position sizes.
Europe offers a deep and diverse investment market, giving exposure to a rich array of structural themes, from its leadership in ‘Responsible Capitalism’ and ESG to the digitisation of industry. The old narrative of Europe as a cheap, structurally challenged market no longer rings true. Our European equities team has the opportunity to cherry-pick companies from across the continent. The skill, however, is to combine these into a cohesive whole.
The core of a portfolio should be robust and dependable. That can sometimes mean investing in companies with unexciting growth rates, but less volatile returns. Consumer staples such as Nestle, or high-quality pharma businesses, such as Novo Nordisk, fit this profile. We then seek to complement these stalwarts with a midfield of creative innovators.
Europe has many to choose from. For example, Danish firm Ørsted, which operates offshore windfarms, or Knorr-Bremse, which is active in green transport technologies. Elsewhere, Dassault and Nemetschek are involved in the digitisation of industry.
Following the football theme, we move up the field to the striker. A mercurial and often misunderstood role. Success here requires versatility and an eye for the goal. Think Italy’s Del Piero or, more recently, Spain’s Fernando Torres. Europe boasts many companies with similar characteristics: less mature, but fast-growing and gaining market share from larger rivals. In our view, we can find examples in Europe’s increasingly eye-catching tech space, such as Adyen in enterprise payments and Prosus in consumer internet.
Why are European equities an attractive investment asset?
Europe has a number of advantages. It is very well positioned to lead in ESG and also in green technologies, it had very broad global exposure with 50%+ of revenue from outside the continent, which gives its companies access to fast growing consumer markets in emerging markets. At the company level, strength lies in Europe’s heritage with companies with great intellectual property built up over decades. We believe that this affords Europe to be well positioned in consumer brands, pharmaceuticals, luxury and even in industrial technology where it is in much better shape than it was in meeting the demand for consumer platforms.
In 2021 we have been focussing the portfolio further. Exiting Wolters Kluwer as a result of a full valuation and overlap with other investments and reallocating the capital to existing holdings that we believe could provide long-term opportunities. This includes Swiss pharmaceutical ingredient manufacturer Lonza and Norwegian media and online market places business Schibsted.
In our view, both of these companies have attractive and largely structural growth potential. We have also added capital to those which have underperformed in the near term, but where we are still enthused by their prospects. Examples include London Stock Exchange, which we believe has the potential to grow in financial services data provision and Ubisoft where we believe there remains a multi-year transformation towards digital and recurring revenues.
Markets have been very strong to start the year and we would say the main risk is that they are now embedding a lot of good news. Multiples are either high in historic terms or at least in near term relative levels for most sectors. Expectations for earnings and economic growth are also high. We would suspect that there is probably more of a constraint from the elevated and optimistic sentiment than anything else. Traditionally from these levels of ISM and PMI data, equity market returns tend to be fairly indifferent.
Cyclical companies and deeper value names have been in vogue since the development of the vaccines in November. While the backdrop remains positive for recovery, these stocks are likely to continue to lead the market. With our longer-term view we remain focussed on the higher quality businesses. While that may well underperform in the current climate we still believe that to be a good strategy for generating longer term returns in Europe.