After huge fiscal and monetary support, economic re-openings and a widely vaccinated population, European equity markets are back in favour amongst investors.
Given the strong returns of US stocks over the past decade and their prevalence within the global index, some investors might be starting to look elsewhere for sources of growth.
Year-to-date, the only other major equity market that is closely behind the American S&P 500 index is the MSCI Europe index, the second strongest performer of all the major stock markets.
Performance of major equity market indices year-to-date
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Source: FE Analytics
Against this backdrop, Trustnet asked three fund managers who focus on European growth stocks for their highest conviction stock picks.
Alten
Edward Greaves, co-manager of the £734m JPMorgan European Discovery Trust, said: “One of the great attractions of European smaller companies is that the asset class includes many entrepreneurial, innovative and dynamic companies, which are often leaders or disruptors in their market niches across many sectors.
“Although the US market is associated with high quality tech companies, investors often overlook the fact that the European smaller companies asset class has many global technology leaders.”
He highlighted Alten – a French engineering and technology consulting company as one of the firms he is most confident on. Alten is up 33% year-to-date and is the trust’s largest position at 3.2%.
Greaves said the company is a “world leader” in its field and praised its stable management team. Its chief executive officer Simon Azoulay has been running the firm for more than 20 years.
“During this time Alten has consistently generated high and profitable growth and attractive free cash flow,” he added.
The company has done this through strong organic growth, but also by investing well in bolt-on acquisitions when the opportunity has arisen, he said.
“Looking at the company’s earnings track record, the structural growth of its end markets and its strong balance sheet, we believe Alten’s long-term growth prospects continue to look very appealing,” Greaves noted.
Netcompany
Matthias Born, manager of the Berenberg European Focus fund highlighted Danish IT consultancy Netcompany, as one of his highest-conviction stock picks.
He described the company as a smaller, more dynamic, and more specialised version of Accenture and Capgemini – large well-known IT services and consulting firms.
Netcompany’s specialisation on new technologies and business with government departments were two major factors behind its growth, Born explained.
He said: “Denmark is a country where digitalisation has been happening a lot over the past several years and is seen as one of the countries where government authorities are most advanced in terms of digitalisation - and Netcompany is one driving force.
“Their business model is very lean, vert efficient, their services are on time and at cost, and they are a really good executer of IT projects - because that's actually what you have to be to win market share.
“It has given them nice growth rates over the years – more than 20% per year since the foundation of the business in the early 2000s.”
Born has owned the company since its initial public offering (IPO) in 2018, but he still has a high conviction despite its share price rise.
“At the IPO I think it was a bit too cheap, but now with more trust in the management team and the business model, valuation ratios have been coming up,” he noted. “But if you believe in the growth rates it has achieved in the past, it is still attractive.”
Netcompany is up 12% year-to-date and is a top-10 holding in the Berenberg European Focus fund.
Inditex
Although it doesn’t appear in his top-10, Charles Glasse, manager of the £162m Waverton European Capital Growth fund, said he is most bullish on Inditex – the parent company of Zara, Massimo Dutti and many other fashion brands.
“Our most successful investments are often in companies which move from having no pricing power to having significant pricing power,” he explained.
“This can happen when capacity fails to meet demand, and we are always on the hunt for companies that can benefit from this scenario.”
In his view, the pandemic created a new opportunity in fast fashion retail, something that Inditex has benefited from, up 21% year-to-date.
He said: “Not only has capacity been reduced by several retailers exiting the high street, but market leaders like Zara have been able to benefit from the increased demand for sustainable manufacturing and online shopping.
“Inditex, Zara’s parent company, is notably set to benefit from the acceleration of online shopping after five years and around €1bn of investment.”
He said that retailers had been evacuating the high street, as the likes of Topman and Debenhams had been unable to meet the demand of fast fashion in a profitable way, overordering stock and using expensive air freight to get stock into Europe
By contrast, Zara and other Inditex-owned companies, source their materials from Europe and North Africa, allowing them to be quick to market without overordering.
Glasse added: “During 2021 when many store trading hours were lost to Covid related lockdowns, it even managed to return overall company profitability to the high level of 2019.
“A further return to normality should allow sales to do well as it benefits from pent-up demand returning to a much diminished high street, while keeping costs under control.”