Commentary

Time to See European Equities Differently

Regulatory and market drivers are positioning Europe for sustainability, says Jamie Ross, Fund Manager of Henderson EuroTrust.

When we look at Europe, the sector constituents of that market have changed meaningfully since 2007; before the last big downturn. These shifts have resulted in the market becoming less economically sensitive. For example, at the start of 2007, the banking sector made up 17% of the European market, whilst the energy and materials sectors made up 10% and 7%, respectively – a combined weighting of 34% in three of the most economically sensitive sectors.1

Today, their combined weighting in the index is 19%; a significant reduction. At the same time, the classic defensive growth sectors of consumer staples and health care have moved from 15% of the index to 26%.2 Europe is simply not the same equity market as it was 10 or 20 years ago.

Tech opportunities

An even more interesting picture emerges when we take a deeper look at the technology sector within the European market. If the lack of tech exposure within European indices has been a historic issue, we see this accusation as far less relevant today. Within semiconductors, Europe has some world-leading technology, whether in the production of semiconductor equipment as with the Dutch company ASML, or with cutting edge products for industrial and consumer end markets as with the German company Infineon and the French company STM.

Within payment technology, the French company Worldline and the Dutch company Adyen count amongst the largest global players. Europe also has attractive online platform businesses, such as Scout 24 and Adevinta, as well as innovative online retailers, such as Zalando and the recently listed AboutYou and industrial software businesses, Dassault Systemes and Kion, as well as a globally leading communications platform-as-a-service business, Sinch.

It is simply no longer true that the best global tech companies are all listed in the US; the opportunity set of tech investment in Europe has improved meaningfully over the past decade.

Decade of sustainability

If the last decade has been all about owning US tech though, in my view, the next decade is shaping up to be the decade of sustainability. This is a theme that European governments, companies and investors have been much more focused on than what we have seen from other parts of the world. If sustainability is to be the major secular investment theme of the next decade, then Europe and European-listed equities are very well placed to benefit.

The majority of the largest renewable energy companies are listed in Europe, as are the global leading turbine manufacturers. European indices also contain a healthy exposure to companies involved in recyclable packaging solutions, green nutrition and electric transport amongst many other areas and themes. In addition, the corporate mentality in Europe is progressive and management remuneration structures often align incentives with environmental objectives.

As sustainability and ESG considerations become mainstream rather than a specialised niche, asset allocation must now be aligned with them. A good example within the Henderson EuroTrust portfolio, is the long-held Dutch business, DSM. DSM is a food ingredients business that is very focused on finding environmentally-friendly solutions to the issues involved in global food production, for both animals and humans.

DSM’s long-term incentive plans for senior management are linked to both financial goals and sustainability goals, in a 50/50 split; thus, the incentive structure encourages management to think about the impact of their businesses on the environment just as much as considering financial achievement.

Awareness leading to action

Investors are becoming increasingly aware of ESG challenges around the world and the fundamental role that corporations can play in improving, or worsening, these issues. And genuine awareness is leading to genuine action. More importantly, investors now have enough data to support the view that adopting an ESG approach does not necessarily mean resigning oneself to inferior performance; as adherence to ESG principles is more likely to lead to higher standards of governance, which in turn, should translate into improved resilience in challenging economic conditions.

With sustainability issues now being prioritised at the highest government and corporate levels, the rise of ESG investing is set to continue and it is hard to see how these considerations will not be incorporated into all our investment decisions going forward. If anything, the use of ESG metrics will represent another key item in the toolkit used by managers to evaluate investments, alongside valuations ratios, earnings growth and balanced sheet strength, among others.

Today’s European market looks very different to what it did 10 years ago, and with the continent leading the way on ESG and sustainability issues, we believe that Europe and European-listed equities are very well placed to benefit.

 

1Source: Datastream, Goldman Sachs Global Investment Research, MSCI Europe Market Capitalisation, as at 01/07/2007

2Source: Datastream, Goldman Sachs Global Investment Research, MSCI Europe Market Capitalisation, as at 17/06/2021

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