Recent data from the Bank of America Merrill Lynch Fund Manager’s survey shows that investor sentiment towards Europe has recently risen from ambivalent to slightly positive – the strongest read since May last year. We do understand asset allocator’s periodic aversion to Europe, but as stock pickers in the European space, we are always excited by the companies we meet and the investment opportunities we find.
The long-term European macroeconomic outlook still looks mediocre. Consensus estimates of Western Europe GDP growth and inflation are currently at +1.3% and +1.5% respectively, as collected by Bloomberg. To the extent that nominal GDP must correlate with revenue growth for the stock market, this presents an anaemic outlook for earnings growth this year. We aren’t economists and don’t intend to take a different view from 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 don’t want to fill the population gap with immigration. If Europe runs out of workers, longer term economic growth will have to come from productivity growth.
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 GFC (great financial crisis) – this doesn’t seem palatable. With a lack of workers and a lack of 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 (in a good way!), 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. Even if one is bearish on Europe, we still think there are companies worth investing in.
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 – all world leaders in their respective niches. 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.
To conclude, we fear that with respect to Europe the macroeconomic outlook keeps people from investing in the region when there are a few fantastic companies that are well worth their interest. One might say that they can’t see the trees for the wood!!
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.
Forecasts are not reliable indicators of future returns.