When examining the economic conditions on both sides of the Atlantic, it is hard to overlook the clear differences.
While recent tax cuts and additional fiscal policies are offering a boost to the US economy, investors are well aware the US is already at record-low unemployment and at a late point in the business cycle. In fact, new Federal Reserve Chair Jerome Powell has already indicated the central bank could raise rates faster than previously planned to avoid the economy overheating.
The story is very different in Europe, with the region at an earlier stage of its economic cycle. After years of austerity, economic growth is buoyant across the Continent and wages remain significantly suppressed. Not only is the macro backdrop in Europe supporting company earnings, we are also witnessing increased demand for environmentally-friendly innovative new products and services. With growth picking up, improving sustainability is likely to be a major focus for both policymakers and companies.
We are witnessing many attractive fundamental opportunities across a number of sectors, each of which offers a sustainable edge over competitors:
A leading indicator of Europe’s economic recovery can be seen in construction activity. While construction volumes in the region have grown year-on-year since 2014, it remains significantly below pre-crisis peaks.
We have exposure to this recovery story through materials suppliers, such as French multi-national Saint-Gobain – which saw 4.7% like-for-like sales growth and 7.5% operating profit growth in 2017. Saint-Gobain, which offers innovative interior and exterior materials and products, is a clear beneficiary of the growing demand for more sustainable, energy efficient buildings in Europe.
While a defensive sector, utilities are receiving an uplift from rising industrial production. The free cash flow yield on offer in the utilities sector is high, while it is also one of the cheapest segments of the European market.
Waste production inevitably rises with industrial activity and we are exposed to this theme through Suez and Veolia, with both multinationals ahead of the curve in terms of recycling processes.
Unemployment across most of Europe remains significantly above pre-financial crisis levels. Italian unemployment is at 11.3%, compared to a low of 5.8% in 2007 – while Spanish unemployment of 16.55% is more than double its pre-crisis low of 8.1%. Only seven of the 28 EU member states have seen employment markets fully recover.
Rising growth is creating a tightening of the employment market. Recruitment consultants are a beneficiary of this trend. We own Dutch-based global recruitment company Randstad Holding, which recorded growth of 11% in Europe – its strongest expanding region – in 2017.
A by-product of an improving economic backdrop is an uptick in consumer discretionary spending. We are tapping into this opportunity though sectors displaying strong balance sheets and robust fundamentals.
Media-related groups, which are highly-linked to the business cycle, sold off sharply in last month’s sell-off. We used the dip as a buying opportunity. We are exposed to various media companies including the advertising agency, Publicist and the professional publishers, Wolters Kluwer and Relx, as well as the French global multimedia giant Vivendi, which has a stable of assets including Canal+ and Universal Music Group.
Auto part suppliers are also well-placed to benefit from current growth upturn. Consumers on the Continent are feeling wealthier and are increasingly willing to make major purchases – particularly as credit conditions remain accommodative.
We are exposed to this consumption trend through Swedish group Autoliv, the world’s largest auto safety parts supplier. Statistically-speaking, more than three airbags and seatbelts from Autoliv have been installed in every vehicle produced globally over the past ten years.
Strength in sustainability
With Europe at an earlier stage of the economic cycle in comparison to the US, support for corporate earnings is unlikely to reverse for the foreseeable future. As the macro backdrop heightens investor interest in stocks on the Continent, we believe corporates tapped into the trend of improving sustainability – those developing environmentally-friendly innovative new products and services – are likely to be at the forefront of demand during the next stage of Europe’s renaissance.
Chris Hiorns, manager of the Amity European Fund at EdenTree Investment Management