Richard Troue: Europe's back and you can cash in with a high-quality approach

 

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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
Arts and Entertainment
Jay Z has placed a bet on streaming being the future for music and videos
music
Arts and Entertainment
Festival-goers soak up the atmosphere at Glastonbury
music
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own