We are investors looking for the best quality growth companies in Europe. These companies have differentiated products that allow pricing power. This allows them to raise prices if necessary to offset higher production costs. These are businesses that can generate high and sustainable financial returns enabling them to reinvest excess cash in long-term growth opportunities and in maintaining their competitive advantages. This in turn enables compounding of shareholder value.

These quality traits are particularly important as we move into a period that’s likely to be more challenging for economic growth. Companies are facing increased cost pressures and softening demand, which puts pressure on profitability and cash generation, particularly when compounded by higher financing costs due to higher interest rates.

We believe companies with high-quality business models will be the best-positioned to navigate the current macroeconomic environment. Pricing power, strong cash flows and balance sheet strength (including low or no debt) are especially important in this context. Over the long term we expect these companies to materially outperform the broader market.

The companies we seek are exposed to secular trends that can transcend business cycles and short-term market challenges. These secular trends include digitalisation and the increasing need for computing power, the shift of global supply chains to “friendly” or nearby countries due  to geopolitical tensions, the green economy, and aging populations and health care innovation. We have found companies that benefit from these secular growth opportunities scattered across the European market.

For example, the Biden Administration’s efforts to isolate China has led to companies moving production of key technology components such as semiconductors to the US. In addition, the passage of the Inflation Reduction Act in the US provides substantial financial  support for green technology and upgrading the country’s manufacturing base.

Manufacturers throughout the semiconducter supply chain are benefitting from these plans to build new plants in the US, including several European companies. These companies include ASML, which produces lithography machines used in microchip production, and VAT Group, which makes vacuum valves used in microchip manufacturing. Advances in artificial intelligence  also highlight the relentless need for more sophisticated microchips; we believe ASM, which produces wafer processing equipment, should benefit from increasing chip complexity.

Building efficiency is a key area requiring investment in the pursuit of a green economy, and companies such as Ireland’s Kingspan, which makes insulation products that reduce building emissions, and Italy’s Carel Industries, which makes heating and cooling control components, should be beneficiaries, in our view. Meanwhile, in health care, there are many companies helping in the development of drug therapies that can help save lives or prevent disease. Denmark’s Novo Nordisk is a leader in the treatment of diabetes and obesity, producing 50% of the world’s insulin supply. The company continuously reinvests in research and development to uncover new treatments and ensure that their products remain relevant.

European markets have remained out of favour for global investors  in 2023, the outcome being that their market valuations remain below long-term averages (based on the price to future earnings ratio, or the share price of the stock divided by expected future per-share earnings). Meanwhile US stocks  are trading at what we consider to be an extreme valuation premium to Europe and most other markets, based on history. US stocks’  premium versus Europe reflects in part the strong performance  of the so-called Magnificent Seven US technology companies (this group includes Apple and Microsoft) as well as market concern about the Ukraine-Russia conflict and the European macroeconomic outlook.

We are cognisant of the challenges caused by such political uncertainty, such as  disruptions to parts suppliers, energy shortages and inflation, but we would argue that the challenges caused by such events are global in nature rather than regional. We are seeking to invest in European companies that are global leaders, which are well positioned with manufacturing or servicing capabilities close to their customers around the world. In fact, our strategies contain companies that produce more of their revenues from outside of Europe than the relevant stock indices.

Europe is one of the world’s most important economic regions and is home to many leading global companies, and we believe that European stocks  warrant their place in any well-diversified investment portfolio.

Please note: Company examples are for illustrative purposes only and are not a recommendation to buy or sell.