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Technical View

European equities: Creating opportunities from uncertainty

By William Ball, Senior Equity Analyst

Unsurprisingly, European equity markets reacted positively to Macron’s decisive victory in the French elections. The result lays the foundations for a more stable political outlook in the Eurozone, with markets able to look ahead to the German Federal elections in September, and the potential for a strong French/German alliance. With the risk of Brexit already priced in, this could mean positive momentum for the region in the latter half of the year. 

Real economic growth versus economic stimulus

This will be welcome news for European equities. Since the global financial crisis, Central Banks have been relentless in pursuing monetary policies to stimulate economic growth. But the material increases in consumption and corporate capital investment have not materialised, which means we have seen little in the way of GDP growth. This has been an unprecedented period in history that has created a wealth effect from asset price inflation, rather than real economic growth.

Cutting through the negative sentiment

Investors often find it tough to allocate capital to a challenged economy or stagnant industry as it can be difficult to see attractive investment opportunities. Earlier this year, enthusiasm of investors was looking subdued, so we took the opportunity to allocate to European equities in the Global High Quality Fund.
In our opinion, understanding the durability of a company’s competitive advantage is an important consideration and a key element that we like to focus on. This approach allows us to take advantage of the inherent short-termism in markets where an asset’s value may be temporarily depressed or masked by macro-economic factors.

Focus on quality

Our strict bottom-up driven process, allows us to find fundamentally attractive stocks for inclusion in the portfolio, where we focus on owning companies with sustainable competitive positions, significant free cash flow, low financial leverage and strong management teams.
Staying true to our investment process has allowed us to seek and participate in the recent opportunities provided to us by the market off the back of this year’s European uncertainty. We believe that our strategy of holding a concentrated portfolio of industry leading global companies, has the potential to compound total returns in excess of the global market over a market cycle or longer.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.