Growth, Politics and Shareholder Activism: European Equities in Focus

Growth, Politics and Shareholder Activism: European Equities in Focus 

Exchanges at Goldman Sachs is one of my favourite ways to keep up with the markets, it is a podcast series from Goldman Sachs where employees of the firm debate important financial issues. The episode I am writing about today features Senior European Equity Strategist Sharon Bell from the Global Investment Research division and is titled Growth, Politics and Shareholder Activism: European Equities in Focus.  

Podcast: https://itunes.apple.com/gb/podcast/exchanges-at-goldman-sachs/id948913991?mt=2&i=1000418016635

Main points:

1- European stocks have been flat compared globally to US equities for example which have grown c. 5%

-Response: I agree with Bell that European stocks are still good for diversification purposes and in this light, their flat growth has not been too detrimental to the average investor. Due to uncertainty over the US trade war which could have a greater impact on US equities than if the populist geopolitical fears play out in Europe [Italy and Germany], European stocks would be my preferred choice if I were to be defensive. 

2- Growth companies have performed well in the European market

-Response: Growth companies which are innovative and have been investing in Research and Development, positioned in structural growth areas such as luxury, and unsurprisingly companies with good balance sheets. Investors are not looking for cheap value companies. 

3- Geopolitical risk in Europe. 

-Response: BREXIT is, of course, the most imminent threat to UK domestic companies and the FTSE, until the deal is finalised, however the positive which Bell highlights is that many companies on the FTSE are not dependant on the UK for their businesses as it is more of a global macro play for them. I expect the market to overreact whenever the deal is finalised, but on a long-term time horizon such businesses will not be impacted too negatively. 

Investment strategy in Europe:

As a long-term investor and keeping a structural long-term growth outlook, some mega-trends I will be looking to gain exposure to in Europe are: 

1- Rapid urbanisation 

**Admittedly there is more opportunity for this mega-trend in developing countries such as Asia and Africa as they become more prominent world powers compared to North American and European nations, although opportunity still exists in Europe namely in infrastructure. Growing cities require substantial investments in infrastructure if they are to continue expanding at their present rate, making investments in companies such as Vinci SA suitable. 

2- Climate change and resource scarcity 

**Climate change is a longer-term opportunity in Europe with my preference for companies which provide clean energy, although food and water demand are more immediate themes investors can choose to invest in and probably expect to see better returns on a 1 - 3 year time horizon, companies such as Danone are suitable, particularly Danone who are focusing on health and organic themed products.

3- Demographic and social change 

**As more individuals around the world are choosing not to have children and invest in themselves sector such as Luxury Goods could offer attractive returns for investors, a diversified company such as LVMH is the default choice for many but Kering’s impressive growth x. 40% over the past few quarters cannot be ignored. Further, Med Tech is an attractive area due to the growing aging population, and playing on under-penetrated segments of this market such as hearing aids could offer solid returns if capital is allocated to companies with a long-term vision such as William Demant Holding Group.

4- Technological breakthroughs 

**Europe lacks technology stocks unlike the US but with the establishment of projects such as Station F in Paris [the largest start-up incubator in the world], there is no reason why Europe won’t contribute to technology in the future. There could be lots of opportunity in Germany too, as an export-driven market with a large exposure to the auto industry, autonomous vehicles and their components could offer investment opportunity too. 

Source: PwC https://www.pwc.co.uk/issues/megatrends.html

Populist undercurrents in Italy and Germany are highlighting immigration tensions and giving rise to separatist ideas in Europe, this coupled with flat growth makes Europe equities less favourable than US equities right now. However there is also macro uncertainty in the US with the trade war looming and possible interest rate hikes from the Federal Reserve could affect consumer sentiment, it would be wise to diversify your portfolio outside of the US and invest in the many structural growth opportunities in Europe. 

Disclaimer: stock recommendations are my opinion and in no way investment recommendations. 

By Ashley Agedah

(A Girl Invests)