As the headline indicates, the Cavendish European fund invests in 20 countries and some nine currencies. So given the culture of Cavendish is to be stock pickers there is a lot of ground to cover in identifying the likely ‘winners’.I recently visited Switzerland and met a number of companies. Overall the Swiss economy is as strong as Germany and Austria. But what’s happening in the rest of Europe?
The periphery is improving. Spain seems to be on the recovery path but Portugal and Greece are still struggling.
France needs to reform its labour market. Italy has similar issues coupled with recession, and there’s a major question mark over how the new government will stimulate its economy.
Looking at some of the emerging European countries, Poland is closely tied to Germany and so looks attractive but Hungary and Czech Republic are less promising with the latter in recession. Turkey is quite attractive, albeit volatile.
Economic growth in 2011 was 9 per cent but has now reduced to 3-4 per cent.
Russia is clearly an area of concern where there may be potential for substantial gains but also losses as the value of the companies is more politically influenced than any other country. And of course after the annexation of Crimea the geo-political risk is very high.
Reverting back to Switzerland let’s look at some of the sectors and shares. We believe that UBS and Credit Suisse need further restructuring and, while we hold BNP Paribas and Société Générale in France, the fund is generally underweight the banking sector.
Also, the pharmaceutical sector is strong in Switzerland but we don’t currently hold Roche or Novartis, preferring to invest in other European pharmaceuticals.
Some other companies that have recently seen their share prices ‘come off’ include employment agency Adecco and luxury goods brand Richemont. This could be a good time to increase existing holdings.
We are also impressed with Feintool, which manufactures systems for fineblanking and forming and is particularly exposed to the automotive industry. It is a leader in its field and regulation around fuel emissions should drive earnings.
Our fund seeks to invest in ‘niche’ companies – often ones that most haven’t heard of but which are gaining global coverage. Geberit, probably not a household name, provides the top of the range flushing systems to toilets in all the first class hotels and properties throughout the world and is targeting Asia in particular.
Two other companies which are interesting are Syngenta and Evolva. Syngenta specialises in crop protection. With the growth in global population, the need to increase the yield of crops put Syngenta in a very good market position.
Evolva is a bio-tech company which uses biosynthetic technics to enhance production yields and the sustainability of food production. Generally, bio-tech companies need to be looked at with care as they can be very ‘cash hungry’ before they begin to generate profits.
Outside of Switzerland, in Ireland there are two companies which in one case is dominating its sector and in the other did lost its positioning, but now seems to be back on target.
The first is called Kingspan, which manufactures insulated building panels for both residential and commercial use. It is leading the field due to combining the two aspects of constructing new homes and properties thereby adding value to the property and also saving construction costs and being environmentally conscious.
Secondly, there is Ryanair, the airline that everyone seems to hate! However, having admitted its faults it is now back to delivering growth.
I haven’t really addressed all 20 countries and the currency issues in this article. But in the first case the fact that there are so many countries that finding growth companies is clearly quite a task but also an opportunity. Some of the European countries are now mature but due to the euro crisis, there are still opportunities to invest in undervalued businesses.
In the emerging countries there is inevitably more risk, which usually stems from the political environment, so while a company may look attractive there can be outside influences that can mean they are best avoided over the longer term.
So where is investment in Europe heading? Given my comments above clearly you can’t look at it in the same way as the UK or the US and you have to assess each country separately. We are bottom-up investors looking for good but cheap businesses first and then potential influences on it, such as its location, being part of the other considerations.
The fact is, there are many multinational companies based in Europe which may not generally be on the radar of UK investors but which can generate good returns for investors. In the UK we have the FTSE 100 but if you look at the Euro Stoxx 50 you will find it comprises of multinational businesses to rival those in the FTSE. There are also small businesses which can be as equally attractive as their UK counterparts.
So, yes, there is plenty of potential in European stocks – it’s just a question of spending the time to identify them.
Caroline Vincent (pictured top of page one) is manager of the Cavendish European fund. The views expressed here are her own.
