Page 33 - DIY Investor Magazine | Issue 36

“Europe has a heritage of experience. The quality of software engineers in France, for example, is second to none. The best companies are where that experience is applied worldwide.” European companies have a notably different ‘flavour’ to US companies – the leading companies may be luxury goods, fashion, media, specialist industrials or pharmaceuticals.
“We own a German company that is a leader in porcine genetics. It is a massive market in the US and this company
is the best in the world at it. It is a low growth region, but there are specialist winners within that.” On that basis, he is always fully invested and is agnostic on the performance of European economies. “Novo Nordisk, Relx, Dassault all have more exposure to the US than Europe”.
Darwall believes the market tends to reward ‘true growth’ companies during times of economic weakness. He defines true growth as high quality companies with solid fundamentals, which offer a value that is measurable and monetizable: “Earnings resilience and growth get re-rated in this type of environment. We are seeing signs of that re-rating today.”
AN ALTERED LANDSCAPE
O’Hara believes investors need to accept that this is a different environment. The cost of borrowing will not revert to zero,
even if rate rises pause, and inflation will persist. O’Hara says: “Investors need to be in cash generative assets. The price paid for individual companies is increasingly important. Inflation isn’t going to go away, but will settle at higher rates. As a result, we are more value conscious.”
‘WE’RE EXCITED THAT EUROPE IS INCREDIBLY CHEAP’
He believes there may be a lot of opportunity on a 12 month view, even if there are shorter-term periods of weakness: “A lot is in the price and we may already have seen the lows,” he adds. However, there are nuances.
Technology looks expensive, he says, while some cyclical sectors still look very cheap – energy, for example. He holds BP, Shell and TotalEnergies among his top 10.
O’Hara says the biggest challenge in recent years has been to retain a valuation discipline, but not be too dogmatic about it and miss opportunities.
“The valuation regime in the decade ahead is likely to be more aligned with an investment approach we’ve always practised.
We’re excited that Europe is incredibly cheap and we’re excited that the upside comes, not from technology companies that are a beneficiary of the free money era, but from picking the right stocks and paying the right price.” He also holds Airbus, LVMH and construction group Holcim.
That said, European investment trust managers are not abandoning growth companies altogether. Many see real potential in the green energy complex, supported by Europe- wide initiatives such as RePower EU.
This has been a favoured area for Stefan Gries at BlackRock, while Darwall has groups such as Neste – which makes sustainable aviation fuel.
The economic outlook may not prove the swing factor for European investors, but there can be little doubt that the environment has changed. A higher cost of capital and persistent inflationary pressures are likely to favour a different type of company.
Increasingly, European markets will favour the careful stockpicker as ‘old-fashioned’ metrics, such as cash flow, pricing power and valuation discipline come to the fore.
[1] https://www.euronews.com/my-europe/2022/11/11/europes-record-inflation-will- peak-at-year-end-but-remain-high-in-2023-says-brussels
[2] https://www.ft.com/content/d3830ba2-bcaa-42a0-b680-d4bf73c6eb62
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Dec 2022
DIY Investor Magazine ·