‘History is just one damn thing after another’. This quip, debatably attributed to British historian AJ Toynbee, might resonate with casual observers of Europe’s economic history since the Global Financial Crisis.
The region has had its fair share of economic volatility since that 2007/8 maelstrom, which saw European banks, as elsewhere, require state-sponsored intensive care, with the European debt crisis following in short order, testing the mettle of European Union unity.
Just when the region was hauling itself robustly out of the Covid-19 pandemic mire, this time last year Europe was front and centre of fears over a recessionary spiral, with high inflation exacerbated by conflict in Ukraine, rising energy bills dampening consumption and central banks in tightening mode.
One year on from the Russian invasion of Ukraine, Europe has adapted to the new circumstances with atypical alacrity. Aside from Russia’s own supply interference, Europe has managed to wean itself off Russian supply to a large degree helped by ample storage, efforts to source alternative supplies and a mild winter.
There is now growing confidence that any energy-related economic slowdown in Europe is not likely to be severe, amid hopes that adequate gas supply can be maintained over the next winter period. Although many leading European companies have been showing operational resilience in the face of mounting challenges, the inflation genie has not yet been put back in the bottle.
Investing in Europe means avoiding guesswork
Whatever the economic climes, however, our research approach is not founded on macroeconomic guesswork but instead on bottom-up analysis, focusing on the long-term growth prospects of quality companies.
These are companies that enjoy market leadership and pricing power, with high operating margins that can mitigate cost headwinds, while financial strength allows their businesses to weather tougher conditions. Many are geographically diversified and typically offer a product or service that endows them with a competitive advantage and a long growth runway that will endure beyond the periodic downturns they may encounter over time.
Fertile hunting ground
Europe remains an investor hunting ground for such quality companies. Although Europe has had a penchant for economic underperformance, enterprise can exist even in the toughest of economic environments, and so the pall of recession that has hung over the region has not tarnished the qualities of many leading European-listed stocks.
Europe is home to iconic luxury goods companies with brands whose heritage are hard to replicate, such as LVMH. The French conglomerate has well-diversified brands spanning from affordable luxury branded alcohol and cosmetics right up to high-end leather goods and champagne.
The luxury industry has grown at 6% p.a. in the last 25 years, and LVMH’s brand diversification has allowed it to out-grow the industry every year during this period – LVMH recently became the first European company to reach $500bn in market value. It is said that CEO Bernard Arnault invented a paradox by “selling exclusivity by the million” and this rings true looking at the company’s pricing discipline. With a focus on sustainable, organic growth, its brand strength ensures its pricing only ever goes one way – up – while the company controls 100% of distribution, leading to significantly high gross margins.
Europe has long been a crucible for pharmaceutical companies with a history of innovation, such as Novo Nordisk. The Danish pharmaceutical company is a quality sustainable company, committing the equivalent of 13.6% of sales to research and development (R&D), resulting in a rich pipeline of treatments.
Novo Nordisk was the first company to produce insulin for commercial purposes in 1923 and since then has been applying its knowledge of diabetes to other serious chronic diseases such as haemophilia and obesity. Novo Nordisk has turned its attention to Alzheimer’s disease, which we think is yet more evidence of the company’s determination to innovate and sustain its long-term growth trajectory.
A number of companies are in prime position for a more hydrogen-based future. Industrial gas businesses, such as Linde, are well placed to take advantage of a hydrogen economy and are leading the way with its investment in technology and infrastructure to assist in scale adoption.
Founded in Germany and Irish-domiciled, Linde has an extensive pipeline, a comprehensive hydrogen-refuelling network, and electrolysers in operation. In 2019, Linde made a strategic investment in ITM Power, a company listed on the UK’s Alternative Investment Market (AIM) that manufactures integrated hydrogen energy solutions to enhance utilisation of renewable energy.
Whatever the travails of Europe, it remains a repository of great companies that should continue to excel on a global stage irrespective of their domicile.
George Dent and Murdo MacLean are part of the investment team on the BNY Mellon Long-Term Global Equity fund. The views expressed above should not be taken as investment advice.