Richard Troue: Europe's back and you can cash in with a high-quality approach
Saturday 01 February 2014
Looking at Europe today it is easy to forget that as recently as 2011 headlines such as "Greek Tragedy" and "Acropolis Now" were common as the debt crisis in Greece took centre stage.
In the depths of the Greek crisis, just as during the worst of the global financial crisis in 2008/2009, shares in European companies looked attractively valued. As is so often the case the point of maximum pessimism proved the best buying opportunity.
Despair turned to relief in summer 2012 and stock markets embarked upon a strong run when European Central Bank president Mario Draghi promised to do "whatever it takes" to save the euro.
Timing investments to coincide with such turning points is notoriously difficult, if not impossible. Many investors will have missed the bottom and after a strong, 18-month period might be concerned the best gains have passed.
It is true the valuation argument is no longer as compelling and shares are not as cheap as they were, but nor are valuations excessive. Europe offers a gateway to opportunities in both developed and emerging markets. Businesses with strong brands or a leading position in a niche market have the potential for sustained earnings growth throughout 2014 and beyond.
Amid the political and economic turmoil of recent years it has been easy to forget Europe houses many globally successful companies with strong cash flow, recurring revenues, and the ability to increases prices without affecting demand for their products and services. Such companies, despite not appearing particularly exciting at first glance, often have more secure profit margins and are well-positioned for long-term growth.
It might be difficult to find absolute bargains in Europe, but this doesn't worry Richard Pease, manager of Henderson European Special Situations, to a great degree. For him it is business as usual; investing in well-managed companies dominating their niche area; and selling high-quality products into overseas markets.
He looks for companies whose growth is driven by long-term trends and where a high proportion of revenues are recurring. Elevator and escalator manufacturers, such as Kone and Schindler, of Finland and Switzerland respectively, are examples. They can benefit from urbanisation and construction booms in emerging markets and a high proportion of revenue comes from maintenance services for previously installed lifts and escalators.
Companies supplying products which are important to the customer, but where the cost forms a small part of the overall price are also favoured.
A good example is the flavours and fragrances industry, where products made by Germany's Symrise and Givaudan in Switzerland, for example, are positively perceived by their customers, yet cost a fraction of their sale price to manufacture. Symrise and Givaudan, as well as Irish food ingredients manufacturer Kerry Group, are able to pass on cost increases as companies are reluctant to use alternatives for fear of altering their products.
Mr Pease aims to avoid companies overly reliant on the vagaries of the economic cycle or which are burdened by too much debt.
He also sees little opportunity in highly regulated consumer utilities (e.g. telecommunications, waste and energy utilities). This is an area where government involvement is particularly important, given its ability to control returns through regulation and taxation.
The portfolio generally contains about 60 stocks, including some higher-risk smaller and medium-sized businesses. Presently, just over half the fund is invested in businesses with a market capitalisation of less than €5bn (£4.12bn).
The fund was launched in October 2009 and so far performance has been impressive, growing by 65 per cent compared with 39 per cent for the sector average.
Following the strong run of the past 18 months the easy stock-market gains have arguably been made.
Looking ahead I believe that a more discerning approach could be necessary and Mr Pease's focus on high-quality businesses at reasonable valuations could serve investors well over the long term.
Richard Troue is an investment analyst at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Money Alert: Surviving Winter
Simon Read: There may be trouble ahead for cohabiting couples who don’t make a will
Mark Dampier: Strong returns can be found if you go the opposite way to the crowds
Money Insider: Would £150 make you switch banks?
Bargain Hunter: Find the deals that have real value beneath the Black Friday hype
- 1 'Not suppost to cry': 9-year-old lists the worst things about being a boy
- 2 To help fuel their propaganda machine against the poor, our government has now decided to redefine the word 'welfare'
- 3 Anti-gay hate preacher accidentally tweets 4,000 followers cartoon clip of him 'confessing' to be a 'homosexual sodomite'
- 4 Woman opens professional cuddling shop – gets 10,000 customers in first week
- 5 Grayson Perry: London needs affordable housing because 'rich people don't create culture'
Rochester by-election: Ukip gains second MP as Tory defector Mark Reckless holds seat
'Beast of Bolsover' Dennis Skinner takes Ukip MP Mark Reckless to task moments after he is sworn in
Rochester by-election: Labour MP Emily Thornberry resigns after posting white van and England flags tweet
France 'blocks' Russian sailors from boarding a warship
Revealed: How the world gets rich – from privatising British public services
Myleene Klass: Ed Miliband 'strikes back' by comparing UK's need for Labour's mansion tax to Hear'Say track
iJobs Money & Business
Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...
Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...
£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens