Thomas Hodges: Tech ecosystem gives reason for optimism for European equities
Proclaiming that you’re optimistic about the long-term opportunity in European equities is likely to earn you some strange stares right now.
Sentiment towards European equity funds has capitulated. Net flows are approaching levels last seen amid the sovereign debt crisis a decade ago. European stocks are now trading well below their 10-year average price-earnings ratio. The war in Ukraine rages on our continued shock and horror. However, we remain optimistic.
It’s the richest set of opportunities we’ve ever had access to. We are seeing the emergence of high-growth disruptive tech companies, industrial companies capable of consolidating fragmented markets, decarbonization-linked climate champions, high-quality consumer franchises, and even a growing biotech industry. full growth. These are companies whose structural growth is favorable and which, for the most part, will grow independently of the macroeconomic climate.
One of the big sources of excitement for us has been the development of the European tech ecosystem. We felt that as the levels of funding and support available to European technology companies increase, more and more companies will enter the public markets, resulting in a steady transformation of the opportunities available year after year.
In the past year alone, 100 new tech unicorns – private start-ups valued at over $1 billion – were minted in Europe. The economic environment is obviously changing, and the sentiment toward private enterprise is much like when Sequoia Capital released its now infamous “RIP Good Times” presentation in 2008.
The financing environment will become more difficult for these companies, but that is healthy. This will cause competitive jerks, allowing the winners to come out stronger.
It will also encourage greater resilience. This extends to the consumer-related digital platforms we have in our portfolios. Although some companies may disappear, the ecosystem itself will be healthier. The fact that start-up clusters have become so established in Stockholm, Amsterdam, Berlin and elsewhere, backed by a growing presence of venture capital, gives us confidence that Europe’s technological transformation will continue in the future.
An additional area that contributes to our optimism about the future of Europe is decarbonisation. We believe that Europe may be a disproportionate beneficiary of what is likely to be one of the defining growth trends of the coming decades. Europe has the institutional will and the industrial and technical know-how to be a leader in this field.
So far we have focused our attention on finding companies providing the infrastructure layer, such as Nexans, but there are a number of companies in Europe that will be crucial in power generation and distribution renewable for years to come.
The opportunity for growth should become more evident much sooner than many would have thought, with the ongoing war in Ukraine forcing governments to advance their plans on renewable energy and energy efficiency. The European Commission has even announced its intention to make the European Union energy independent by 2030. We believe this will be a rich source of outliers that will drive returns in the years to come.
Beyond these exciting new sources of outliers, which sometimes adapt, Europe continues to have centers of excellence that generate real opportunities for long-term growth. These opportunities often go unnoticed, especially niche industrial companies that have the potential to consolidate fragmented markets.
For investors willing to put aside their prejudices and preconceptions about Europe, they will find a wide range of opportunities and one that is trading at a cheap multiple.
Thomas Hodges is an investment specialist, European equities, at Baillie Gifford.