Writing an annual outlook for Henderson European Focus Trust doesn’t necessarily come naturally. We don’t view things on a yearly, or even bi-annual basis. Instead, we seek to identify the multi-year themes that will shape businesses and economies for some time to come, with the goal of achieving long-term capital growth for our investors.
However, there are still lessons that can be drawn from a tumultuous year for markets and economies. Equally, there are factors worth monitoring in the year ahead, even as we maintain our focus on the longer-term horizon.
When we think of European markets, we think broadly in terms of trends that are impacting businesses and industries on a global basis and that can be channelled through European shares. For us, these fit into clear categories: the boom in capital expenditure, the notion that bigger is currently better when it comes to business and companies that are resilient regardless of the macroeconomic context.
Companies are spending more on themselves – i.e. engaging in capital expenditure – on a wide-ranging basis due to a proliferation of factors. Some of this is externally-driven, including pressure from governments to bring operations closer to ‘home’, while some is driven by a desire to remain competitive, including the big tech companies investing in the infrastructure required for AI implementation and experimentation.
In both these cases, Europe’s ‘makers’ are key beneficiaries, particularly when they have established reputations in particular niches.
Elsewhere, the brewing industry is an exemplar of the notion that bigger can be better. Where smaller breweries flourished pre-pandemic on producing experimental product at relatively low levels of profit, rising costs, in both borrowing and operational terms, are resulting in widespread failures. One of the large scale, highly profitable brewers like ABInbev seem to us to be the most likely candidates to fill this void.
Finally, some industries are resilient regardless of the macroeconomic factors surrounding them. One example is aerospace, experiencing a continued period in the sun after the pressures of the pandemic and which we invest in through Airbus and Safran.
One lesson that 2023 taught us was to stick to our guns. This lesson was drawn from an instance in which we didn’t. We have generally avoided investing in banks but felt that they would do well in a European bull market, so bought into them early in the year. Following the collapse of Silicon Valley Bank, the sector as a whole suffered a fall in valuations.
We realised that the short-term gain that could be made from a bull market was ultimately countered by longer-term challenges of which we were conscious, including building regulatory constraints and the potential for one-off taxes in the aftermath of the interest rate-induced boom in earnings.
In an era when borrowing remains expensive and the economic outlook far from certain, we believe that those companies that traffic in tangible goods, including energy, infrastructure and supply chains will be desirable. This is good news for Europe, which is overrepresented in this field, with the continent housing global leaders in renewable energy infrastructure, semiconductor manufacturing equipment and the provision of automated factories, to name a few.
While the desire of Western governments and businesses to build localised resilience into supply chains is known, we are seeing real-time investments being made in a bid to achieve this goal, a reality that we believe is still underappreciated by the market.
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