The companies we invest in have been telling us that they are starting to see a more normal demand environment and an end to inventory disruptions that began during the Covid pandemic. This normalisation is supportive because companies can have a clearer outlook for their businesses and will be able to make more rational investment decisions.

We think Europe offers diversification opportunities for investors, with a range of leading global companies across consumer and luxury, industrials, health care and technology.

This is particularly true when compared with the US market which is dominated by the ‘Magnificent seven’ large-cap tech companies. In addition Europe continues to trade at attractive relative valuations.

Moats and pricing

We are optimistic about earnings growth this year in our holdings. In conjunction with a stabilisation of or falling interest rates this should be positive for equities, and in particular for long-duration equities – such as the quality-growth companies that we like to invest in.

As stock pickers, we look for European companies that are global leaders in their sectors with differentiated products and economic moats that provide pricing power. These businesses generate high and sustainable returns and invest excess cash in long-term growth opportunities and in maintaining their competitive advantages.

We see many opportunities in European listed companies that have access to structural growth trends that transcend business cycles. These trends include electrification of global infrastructure, the green economy, digitalisation and the need for computing power and health care innovation.

Electrical and digital

For example, Scheider Electric is a French-listed and global leader in low and medium voltage electrical products, used for energy management and industrial automation. It is benefitting from demand for infrastructure electrification, improved energy efficiency and growth in data centres, (with sales of equipment used in data centres growing by 20% a year).

Supplying chipmakers

In technology, we would highlight three European companies that are leaders in their respective specialties, and we believe are well-placed to benefit from growing semiconductor demand and increasing chip complexity for applications such as AI. ASML produces lithography machines used to create the ever-shrinking chip designs; VAT Group makes vacuum valves that are critical to maintaining the integrity of the clean manufacturing environment needed for chip production. ASM sells the pivotal deposition technology that will enable next generation chip manufacturing.

Health care innovation

In health care, Novo Nordisk is a well-known Danish company, responsible for producing 50% of the world’s insulin. The company has become a global leader in the treatment of not only diabetes, but also obesity, with a strong record of research and development.

Two lesser known health-care companies that we like are Lonza and Sartorius Stedim. Lonza is a Swiss-based global leader in contract development and manufacturing for complex biopharmaceuticals and is benefitting from outsourcing trends in the industry. It has technological breadth and global scale that makes it a partner of choice for both small biotech and large pharmaceutical customers.

Sartorius Stedim is a French-listed, global leader in the provision of manufacturing equipment for the highly regulated biopharmaceutical industry. Its products are used throughout the life cycle of a drug, giving it sticky revenues and good growth opportunities.

Supportive backdrop

We are cognisant that there is an abundance of potential headwinds including macroeconomic uncertainty and higher financing costs for corporates and individuals, as well as geopolitical risk including supply chain disruption around the Red Sea and political noise from elections this year.

Nevertheless, we are optimistic. While European equities haven’t matched US performance since Covid, the returns have been healthy, including +16% last year for the FTSE World Europe ex-UK index. We believe that a normalising demand environment and compelling valuations will provide a supportive backdrop for earnings growth and shareholder returns.

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