European Companies: Seeking Winners on the World Stage
Alexander Darwall, Head of Strategy, European Growth - Jupiter Asset Management Limited
Europe has some great investment opportunities, but you could be forgiven for thinking otherwise. In March, the European Central Bank cut sharply its growth forecasts for 2019 and pledged to keep interest rates negative.
Yet with consumers and companies unwilling to borrow to fund their consumption or investment, the central bank’s limited ability to stimulate economic growth is clear.
Meanwhile, Donald Trump’s use of truculent trade tariffs to bring China to the negotiating table has highlighted how vulnerable much of Europe is to external shocks – especially because since the eurozone debt crisis of 2011 it has been unable to generate enough domestic growth. Indeed, the EU Fiscal Compact prevents many European countries like Italy from using tax cuts and higher government spending to stimulate their economies while those with large budget surpluses such as Germany, who could do so, remain reluctant.
But, despite the apparent gloom, it is important to note that European companies have not stopped investing. One simple thing they do is to look elsewhere. Corporate investment no longer goes primarily into the eurozone, it flows out into the rest of the world. This is why our investment approach has never been a play on domestic Europe. Instead, we search hard to identify European companies run by highly competent management teams with some special product or service, often protected by intellectual property rights, which allows them to take advantage of moments of change. These moments typically arise from change in regulation, consumer habits, technology and innovation. Changes in banking regulation hampered incumbents and left gaps for nimble opportunists. For example, a German small-ticket IT leasing company has developed its own highly specialist digital database and flourished by offering tailor-made financing to small businesses in a way which big banks struggled to do.
We are looking for ‘winners through the economic cycle’, companies that can come out of a recession stronger than when they went in.
We do not like companies where a binary outcome is likely, for example where success depends on whether the dollar is going up or down. We avoid telecoms and utilities where regulators can control competition and cap profits, or companies which use debt to supercharge pedestrian earnings. We prefer companies which are ‘future proofed’, i.e. companies which are relatively agnostic about which way their industry is going. For example, the world’s leading chocolate manufacturer is largely indifferent about whether it sells to global multinationals or trendy pop-up shops in California selling innovative vegan, dairy-free and Ruby chocolate.
We look for structural changes in the world and companies that can benefit from them. For example, the long-term rise in obesity not only creates opportunities in treatment but also in the drive towards healthier lifestyles. Thus, the world’s leading insulin supplier continues to prosper by treating the diabetes pandemic. We also like the world’s foremost salmon farmer where long-term demand from healthier eating is outstripping supply. This Norwegian company differs from its peers in being able to produce fish feed, do its own processing and sell value-added products. Such ‘vertical integration’ allows it to capture more of the profit.
The growing sophistication of digital technology offers great investment opportunities. For example, the world’s second-largest sporting goods company uses digital technology to be supremely consumer-driven. This is a key advantage which, along with formidable brand strength and strong global growth, makes it hard for peers to compete. Another example is a French company specialising in prepaid corporate vouchers which uses digital technology to increase the range of its offerings and reach more customers with greater convenience for them.
Indeed, we see digital technologies everywhere, from publishers cutting the costs of distributing legal and scientific journals worldwide to a company which provide power semiconductors for cars. In our view it could be a winner because of the increasing use of digital technology to develop the connected car. In the digital payments space, we focus on companies who do not particularly care which methods of payment or schemes will prevail. Whether you are serving Visa or Mastercard or looking at point of sale terminals or code-scanning contactless, considering all the ways it could change, you need to be a payment company that can succeed in a range of scenarios.
In summary, we are looking for ‘winners through the economic cycle’, companies that can come out of a recession stronger than when they went in. We ask ourselves whether a company is special enough to take advantage of the opportunities ahead? We focus on companies with robust business models that operate in a favourable industry landscape. Where such companies compete
on the world stage and succeed, the rewards can be commensurately great.
This article is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally. Past performance is no guide to the future.
The views expressed above are those of the Fund Manager at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.