European equities: local expertise and global reach combine in long-term, climate-friendly opportunities
- 05 December 2023 (5 min read)
Key points:
- Large-cap companies provide access to global sources of revenue
- Diligent stock selection is crucial to identify long-term growth potential during periods of market volatility
- Europe is home to a diverse range of sustainable companies, crucial to build up an all-weather portfolio
“Convictions without diversification is risky. Diversification without conviction dilutes alpha.
Our strategy combines both.” - Hervé Mangin, Portfolio Manager
During periods of ongoing, unpredictable market volatility, it’s understandable for investors to lose focus on their long-term growth objectives whilst being subjected to a barrage of headlines. In recent times, these have ranged from changeable government and monetary policies, regulatory movements, volatile trade tensions, all the way up to the increasing scale of tragic geopolitical crises - and the terrible humanitarian costs involved.
As we seek to navigate such difficult times, one of the best ways we can continue to serve our clients and pursue their long-term goals is with our mission to seek sources of sustainable, large-scale growth. The climate emergency continues to be an additional threat to our global community and economy, and yet it remains one of the most underrated financial risks;1 it is our privilege and duty as an asset allocator to ensure that we stay on-mission to employ our market-leading research and portfolio management capabilities to identify sustainable opportunities which, we believe, have the greatest potential to achieve our long-term goals across market cycles. Investing solely upon the merits of companies selected through diligent research and with a firm conviction in their growth prospects can still be achievable through selecting companies with strong balance sheets and growth potential, effective management models, and integrating an appreciation of environmental, social, and governance (ESG) factors to produce a risk-adjusted strategy.
Why European equities?
In seeking the best long-term opportunities for our Sustainable Europe strategy, we are able to access a diverse universe of companies in the geographic continent (including the UK). Regions such as the US have recently benefitted from high-profile macroeconomic and artificial stimulus, with companies set to benefit from unprecedented injections of capital and tax incentives to promote domestic investment such as those provided by the Inflation Reduction Act. While this is undoubtedly a boon for such regions and attractive for investor sentiment, and the EU has responded with related measures of their own, a measured response focusing on ‘quality’ over scale of subsidies can be seen as an indication the importance of long-term strategies, particularly in a region already leading the way in some areas of clean energy investment, for example.2 Additionally, the frequent and aggressive interest rate hike cycle adopted by global central banks in response to inflationary pressure is expected to taper off as we head into 2024 and inflation is showing signs of a slowdown; this is expected to be a tailwind for equities as investors with growth targets may start to shift their focus away from debt instruments.3
By targeting companies with the best fundamental attributes described above, we also benefit from a wide range of global revenue exposure. Europe is home to numerous market-leading companies, and their global reach and customer bases may very well allow us to benefit from global climate incentives, whether that is through new global business partnerships or through an increased vigour for companies to enhance their climate credentials.4 It is home to both established and entrepreneurial companies, which become the large-cap players of tomorrow, and in the current climate, the financial and earnings potential of European equities are not always being reflected in their valuations.5 During periods of short-term volatility, the benefits of an actively managed strategy should not be overlooked, particularly the ability to pursue long-term revenue and margin growth and select the best-placed individual stocks which look likely to achieve this over a long-term investment horizon.6
For example, Dassault Systèmes, a France-based 3D software developer (in its simplest term), is a company which is well placed to directly benefit from the move to less-carbon intensive working and manufacturing processes. Its 3DEXPERIENCE platform offers access to 12 brands which provide tools for collaborative working, including the use of ‘virtual twins’ which allows companies to design, engineer, and test complex products, processes and operations. These capabilities span diverse sectors from automotive products to healthcare, and are likely to prove valuable to organisations looking to implement more efficient, safer ways of working, whilst cutting down carbon expenditure.
UK-based publishing group Informa offers its global academic and B2B clients a suite of capabilities including international events, digital services and knowledge sharing using hundreds of highly specialised brands. Its mission to spread knowledge and cutting-edge content, whilst connecting people and places via its sophisticated networking capabilities, is underpinned by its ‘FasterForward’ scheme, a codified five-year commitment to sustainability. Embedding sustainable practices complements its long-term growth strategy aimed at building depth in specialist markets and increasing the pace of global digitisation.7
The healthcare giant Novo Nordisk, based in the Netherlands, provides another example of a European-based company with significant global reach. Its overarching mission is to drive change and help tackle serious chronic disease, and since its 1989 merger has used this combined expertise to expand and address multiple global health concerns. Recent results of its weight loss drug Wegovy have been promising, with trial data suggesting a potential 18% cut in risk of death for patients.8 Along with its existing portfolio of high-profile pharmaceutical assets, the company has seen its valuations soar in recent months.
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Conclusion
The case for European equities – particularly those which incorporate sustainable, climate-friendly practices within their core operations and mission – remains a compelling one for long-term investors, despite the short-term volatility that equities, as an asset class, can be prone to attract. Seizing the potential of these opportunities, as well as taking a prudent future position on the risks surrounding climate change, should be considered carefully by investors. At AXA IM we believe that experienced active strategy management, with the appropriate technical expertise and nuanced market knowledge, has the potential to help investors benefit from skilled stock selection and conviction over a long-term investment horizon.
Companies shown are for illustrative purposes only as of 05/12/2023. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.
Risk warning
No assurance can be given that our investment strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to specific risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes, volatility risk, liquidity risk, credit risk, counterparty risk, derivatives risk, legal risk, valuation risk, operational risk and risks related to the underlying assets. Some strategies may also involve leverage, which may increase the effect of market movements on the portfolio and may result in significant risk of losses.
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