Finding opportunities across the market cap spectrum

Investor sentiment towards Europe remains at a low, coming against a backdrop of weaker global growth and political risk. Change, however, could be afoot with the ECB’s recent announcement of new money stimulus in addition to calling for fiscal action by European governments. Although this won’t be a quick fix solution, we believe there are still an exciting number of companies worth investing in.

Europe has had a disappointing year, demonstrated by the Eurozone’s second quarter GDP growth rate which was recently confirmed at 0.2%. This limited growth was severely impacted by Germany’s contracting economy in the three months to June, driven by unrest within its car manufacturing industry, trade wars between the US and China and escalating fears over Brexit. The long-term European macroeconomic outlook also looks mediocre and we don’t intend to take a different view from the consensus in this regard.

In the medium term, a low fertility rate across Europe suggests populations will decline, and political movements across the continent suggest that voters are reluctant to fill the population gap with immigration. If Europe runs out of workers, longer term economic growth will have to come from productivity growth.

It is clear that productivity growth in Europe hasn’t escaped the long-term global downtrend. There is speculation as to the reasons for this global decline, but one theory argues that quantitative easing has prevented the completion of the economic cycle (i.e. recession) where creative destruction clears out the dead wood of an economy and allows the recycling of capital into more productive assets. This is known in some circles as the ‘Japanification’ of Europe. The alternative, of course is that we suddenly remove QE and finally have the credit bust that has been postponed since the great financial crisis – this doesn’t seem palatable. With a lack of workers and productivity growth, one wonders why we are excited about investing in Europe.

Just because Europe isn’t growing fast doesn’t mean that there isn’t a high starting level of wealth. This translates into capital looking to back interesting ideas, and an educated population with those ideas. While Silicon Valley is the poster child for what happens when capital meets ideas, Europe has a similar fertile environment if one is willing to look outside European mega-cap companies. We are able to find great businesses – often world leaders in their particular niche that are growing out of a European base.

While Europe’s indices are dominated by large cap pharmaceutical and bank stocks, we’ve found far more esoteric and interesting businesses further down the market cap spectrum, from a yoghurt ingredients maker, to a chicken processing machine manufacturer, to a provider of the software that banks run on. We are particularly excited about the European online and banking sector. Our top holding is FinecoBank, the Hargreaves Lansdown of Italy. We believe that 60% of the asset management market in Italy, which is controlled by regional banks, is the addressable market over the next decade. Europe is also very strong on brands, particularly luxury goods and cars. Ferrari is one of our top holdings in the portfolio as we believe it has the potential to become the largest car company in the world.

These are businesses that we believe will thrive whatever the global economic outlook and although they have some domestic European exposure, they tend to be in niches that are growing at a very different rate to that of the European economy. In markets like these, it is more, not less important to focus on the long-term fundamentals and ignore the short-term noise.

In summary, even if one is bearish on Europe, we still think there are companies worth investing in. We fear that the macroeconomic outlook for Europe prevents investors from considering the region as a viable investment option. This is despite the many fantastic businesses who still have their best days ahead of them.

Risks:

The value of shares and the income from them are not guaranteed and can go down as well as up.

Currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.

This fund may experience high volatility due to the composition of the portfolio or the portfolio management techniques used.

Forecasts are not reliable indicators of future returns.


Important Information

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Source: Link Fund Solutions Limited, Miton and Bloomberg.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.

The Prospectus, KIIDs and application forms are available in English from the Authorised Corporate Director of the fund, Link Fund Solutions Limited, at www.linkfundsolutions.com; or from Miton, the Investment Manager of the fund, at www.mitongroup.com.

This financial promotion is issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.

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