The European beaches are empty, but can those deck chairs be filled?

VT Tyndall Global Select Fund

The European beaches are empty, but can those deck chairs be filled?

At the turn of the century 41 of the world’s 100 most valuable firms were European, today that number has fallen to just 15. Technological progress and the rise of the Chinese dragon explain part of this shift, but is there something more underlying that has stopped European companies keeping up with their global peers and if so, does it mean that European equities are destined never to have their time in the sun?

The obvious answer to the first part of the question is yes. Political interference, ongoing debt crises, systemically high youth unemployment and nationalistic agendas have all contributed to the delay in political and economic integration. Instead of embracing the opportunity and developing their own Silicon Valley, the European Union appears to be content to cry foul and try to reign in the global technology leaders through regulation and fines. European equities have traditionally traded at a discount to the US, which is partially explained by the relative weightings of technology and bank stocks in their retrospective indices, however, this discount has widened over the past 5 years to almost record levels.

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Big, however, does not necessarily mean profitable and growing; often the best opportunities can be found in investing in smaller companies that have captured a niche market, or have a significant differentiating factor from their larger peers. This is an area where Europe, and Germany in particular, has excelled. The Mittelstand has long been admired worldwide, employing almost 60% of the German workforce and producing the largest share of the country’s economic output. It follows, therefore, when the Mittelstand if firing on all cylinders, German exports and the wider European economy are likely to be robust too.

The US technology stocks account for almost two thirds of the outperformance of the US relative to Europe over the past decade, and without a strong and growing technology sector, it is unlikely the Europe will be able to grow at a faster rate than the US over the medium to long-term; this, however, does not negate periods of outperformance which often can be short lived, yet pronounced. As the vaccine roll-out progresses and the European economy has started to open, European economic data has started to improve, and the rate of change of improvement has greater upside to that in the US, given that the economy is behind in its cycle of opening up.

The Belgium business confidence survey is regarded as one of the best indicators of the state of the European economy, given the proportion of its trade coming from and going to the two largest European economies; encouragingly the survey has seen a significant uptick since last year, and the readings have continued to increase.

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One of the benefits of being a global fund manager, is that our remit allows to invest in best of breed companies, regardless of their country on domicile. We believe that, despite some of the structural headwinds that face European corporates, that not only are there examples of global champions but also a large number of well-managed, cash generative companies that operate in niche markets can be found in Europe. As an unloved region by many investors, often many of these opportunities are discounted by the wider investment community and thus can be found at reasonable valuations. Furthermore, in a world where multi-national trade is commonplace, country of listing should not be a hindrance to the returns on invested capital, or profitability, of a company, but is simply a regulatory obligation.

8th July 2021
Read time : 4  mins

This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
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Disclaimer

WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not