A rise in technology patents and venture capital activity in Europe could be pointing to a strong run for European equities, according to fund managers, as companies on the Continent aim to rival the US tech giants in the coming years.
Investors who have held US tech giants such as Facebook, Amazon, Apple, Netflix and Google (also known as the FAANGs), have been handsomely rewarded over the past decade.
But before the success of the of the FAANGs, there was a steep rise in patent activity and venture capital (VC) funding in the technology ecosystem around smartphones, streaming and social media, which paved the way for the rise of companies such as Apple, Netflix and Meta.
These companies have helped to drive the US stock market forward over the past decade, far ahead other major developed regions – including Europe.
Performance of the S&P 500 versus Euro Stoxx over the past decade
Source: FE Analytics
But in the same way that rising patent activity and venture capital funding in these consumer-facing technologies was a precursor to the success of the FAANGs, Marcel Stötzel, co-manager of the Fidelity European Trust, said a similar trend is now playing out in Europe.
“The real signpost is patent data, because it's the very first indication of where it's eventually going to become an idea, and it's eventually going to be VC funded and then an established trend for all kinds of listed companies to participate in,” he said.
He noted that there has been a shift in patent areas with implications for business-to-consumer technologies (B2C) such as virtual reality (VR) and social media, to areas with more business-to-business (B2B) implications.
The fastest growing patent areas are now in cloud computing, edge computing, 5G, artificial intelligence (AI) and robotics – all of which Stötzel said will profoundly affect B2B companies.
Another fast-growing area for patents is in the semiconductor space, which might seem like a consumer area, but Stötzel stressed that it is more impactful for B2B businesses.
“Getting a slightly faster smartphones or laptop is not really a game changer, but getting a much faster B2B semi-chip out there driving AI, and hopefully one day driving quantum computing, is going to be much more revolutionary in the B2B space,” he explained.
“If you look at the patents that are being filed, over the next 10 years it looks like the leadership in terms of innovation is going to shift from B2C to B2B. This has happened in the past. Every 10 years this tends to oscillate as we see decreasing marginal returns of investment.”
Decreasing marginal returns of investment refers to the theory that, after a certain level of capacity is reached, additional units of investment results in smaller increases in return.
“Is there much B2C space left that hasn't had the hell invested out of it from Google, Facebook, Amazon or Netflix?” Stötzel asked. “There just hasn't been nearly as much money flowing into B2B applications over the past 10 years and that means that there's just a lot more low hanging fruit in this space.”
The fact that there are more patents in these B2B areas across Europe is why he said the technology leadership will shift from the US to Europe over the next 10 years.
“If you look at the enablers of this B2B revolution, there's just a lot more European companies in this space,” he said, pointing to companies such as SAP, Capgemini, Dassault Systèmes and Ericsson.
“It's not entirely a coincidence because obviously Europe does have a much bigger legacy of B2B production than the US,” he added.
The manager predicts that the spill over effects of these innovations will benefit European B2B companies in the same way that the B2C innovation in the US benefitted the FAANGs.
“The reality is that a lot of the industries that are going to benefit the most from this scenario, things like the utilities, the big industrials, the pharmaceutical companies and banking – these are industries that Europe has a legitimate leading position in and will benefit the most,” he said.
But not all the innovation and returns will be limited to the B2B companies in Europe, according to Stephen Paice, manager of the Baillie Gifford European Growth Trust.
He pointed to the operational progress of companies like Hello Fresh and Delivery Hero, which he said “are continuing to build unassailable leads over the competition”.
“Europe also has a number of leading classifieds businesses – Schibsted, Adevinta, Hemnet, Auto1, and those owned by Prosus come to mind – that have been sold off, but again their future looks bright,” he added.
“These are platforms that benefit from network effects and scale, and the ability to monetise their user bases by offering more transactional services. Think about a real estate or autos listing business (like Rightmove and Autotrader in the UK) being able to offer insurance, financing, delivery etc.
“This will dramatically change their earnings potential. These businesses have a real chance of producing extreme returns over the next decade.”
Paice also noted a growing funding environment in Europe both public and private – a good sign for its technology companies.
There was roughly $100bn invested into its tech ecosystem last year, 100 or so new unicorns up from a base of roughly 220, and the region accounted for a third of all early-stage funding (rounds up to $5m [£3.7m]) – on par with the US.
“Not long ago, it would have also been unbelievable to think that companies like Northvolt would be able to raise $2.75bn as they did in June,” Paice said.
“Its mission to build the world’s greenest batteries will help drive Europe’s energy transition, but it also shows clearly that we have the resources and broad support to help Europe’s companies make an outsized contribution to society’s most pressing need.”
Although Europe’s public markets are sometimes perceived as a 19th century index, with century-old companies such as Nestle, Roche and LVMH, Paice thinks there is a profound change unfolding underneath the hood – pointing to growing companies such as the Dutch payments provider Adyen, the German e-commerce firm Zalando, and the German food delivery firm Delivery Hero.