Opinion | The keys to restoring Europe’s attractiveness among investors. Ben Ritchie from @abrdn_ES

MADRID. European stocks have struggled to compete with US stocks for several years now. However, historically low valuations for European equities could be a turning point. However, will the markets notice this? Or will they continue to concentrate capital in the United States, where only a few stocks lead the market? European companies’ revenues are more geographically diverse than those of the US market.. Europe also offers broader sector returns than the US, where tech stocks disproportionately drive the market. Meanwhile, a period of geopolitical stability will attract investors to Europe. This is because the continent is more connected to global economic growth than the United States.

It was said that, We believe investors should focus on specific European stocks rather than the entire market. The key is to invest in those companies that have the potential to offer positive and consistent returns over the long term. For us, international investors who are leaving the European market are missing out on the opportunity to invest in world-class companies.

Where do we see long-term opportunities? There are options throughout Europe, but The most interesting sectors are industrials, technology, healthcare, luxury goods, specialty chemicals and consumer staples. These industries will be driven by major global trends such as demographic shifts, the energy transition and increased business investment in technology. Many European companies are also ideally positioned to benefit from growing and increasingly prosperous consumption in emerging markets.

How does this come to life? ASML Holding develops, manufactures and markets semiconductor manufacturing equipment. The company has a monopoly on the equipment needed to produce the cutting-edge chips that will fuel the current and future computer revolution, especially artificial intelligence. We believe this advantage gives the company pricing power, a high degree of growth visibility, and the ability to generate an attractive return on capital.

“Chip Wars”

ASML management has called 2024 a transitional year, which should turn into a successful 2025. Geopolitical tensions around China and related “chip wars” are causing concern. However, the company’s current strategy is to mitigate the worst-case scenario (a complete ban). More importantly, its valuation indicates significant outperformance based on projected growth and profitability.

In the pharmaceutical field we like Nordisk. It is a leader in the treatment of diabetes and offers insulin delivery systems and other products to treat the disease. The company successfully relaunched its famous anti-obesity drug Wegovy. This could be an important source of future growth. Novo Nordisk’s deep scientific knowledge and a sector with high entry barriers enable the company to maintain a strong market position. This situation also supports double-digit revenue growth potential for the entire company.

One sector in which Europe is a world leader is luxury goods. And in this space, LVMH – owner of world famous brands such as Moet, Louis Vuitton and Dior – stands out. After a strong 2021, there are few signs of deterioration in operating results. Factors such as pricing power based on best-in-class brands and consistent demand should insulate it from cost inflation. The sector has been relatively resilient in previous episodes of market turmoil. Increasingly wealthy buyers in emerging markets should also help boost sales in the coming years.

Finally, cosmetic giant L’Oréal. In our opinion, it has one of the strongest business models in Europe. The move to online sales has strengthened its dominance, and its valuation is reasonable given its long-term growth prospects. Like LVMH, its exposure to wealth growth in emerging markets is a potential profit driver.

Four keys

What factors does Europe need to regain its attractiveness among investors? Mainly four:

• Existing earnings expectations should keep valuations relatively low. compared to other global stock markets.
• European companies must deliver superior and sustainable profit growtha key factor in attracting investors.
• The third element consists of avoid the political/economic problems that have marred much of the last decade and systematically discourage international investors.
• Finally, The best recipe is a long period of stability characterized by profitability and growth. make Europe attractive again in the eyes of investors.

These factors, combined with a well-selected portfolio, allow European stocks to potentially compete with any other stock in the world over the long term.

Note. Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as investment advice or an indication of future performance. Past performance is not indicative of future results.

Ben Ritchie will head developed markets equities in April