Sharing his thoughts on what the new Trump era might hold for Europe, David Walton, manager of the IFSL Marlborough European Special Situations Fund, tells us why, for investors, he believes that the key lies in avoiding the dramas and spotting hidden gems by digging deeper.
Donald Trump’s relationship with Europe has always been somewhat on the fraught side. As his second spell in the White House gets under way, there are plenty of signs that tension and antagonism could remain defining factors.
For instance, implying the US might invade Greenland is not exactly an obvious basis for rebuilding political bridges. Declarations to that effect have been politely described as provoking “a certain incomprehension” among European leaders[1].
Maybe more realistically, there is also the prospect of swingeing tariffs. Both during his campaign and as President-Elect, Trump repeatedly threatened blanket penalties on all goods from the US’s trading partners.
China, Mexico and Canada were warned to expect the very worst. But even European economies were told they would face tariffs of between 10% and 20% from the first day of the returning Commander in Chief’s new term[2].
It might be worth noting that history indicates Trump’s bark could yet prove worse than his bite. Like any politician, he is scarcely guaranteed to translate every pledge into policy. The new US Treasury Secretary, billionaire financier Scott Bessent, has already spoken of an approach of “escalate to de-escalate”[3].
Nonetheless, let us imagine Trump sticks to his word. Would Europe in its entirety lose all investment appeal virtually overnight?
Hardly. Such a turn of events would instead serve as a reminder that the best way to identify many of the region’s brightest opportunities is to move beyond the headlines and concentrate instead on what is happening at the company level.
Small and domestically focused
The attractions of Europe’s smaller companies have long been overlooked by much of the investment community. Attention is far more likely to be directed towards mega-cap and large-cap businesses, most notably those in the US.
This paucity of interest flies in the face of the fact that smaller companies have a record of outperforming their larger counterparts over time in a variety of settings. Historically, the phenomenon has been particularly likely to occur during periods of economic recovery[4].
For a fund such as ours, which is heavily weighted towards Europe’s smaller businesses, the most reliable way of unearthing hidden gems is to engage directly with individual companies’ management teams. In doing so, we seek compelling evidence of quality, efficiency, strong cashflows and capacity for growth.
We also run the rule over a business’s export markets. One reason for this is that smaller companies are sometimes better able to survive and thrive when they have a more domestic focus.
Consumer goods manufacturer Sarantis, which has a market capitalisation of around £600 million, is a good example. It is based in Greece but has a presence throughout Europe. As well as facing little competition from global brands, it has minimal sales in the US – so it is essentially Trump-proof in that regard.
In keeping with many of our holdings, Sarantis has experienced difficulties in the past. It suffered amid the tumult of 2009’s Greek government debt crisis and, like almost every company, faced significant challenges in the face of the COVID-19 pandemic, soaring interest rates, inflation and rising costs.
Yet Sarantis’ solid fundamentals have allowed it to survive these tests and enter a new phase of growth. While the market as a whole has undervalued it, we feel we have been able to recognise its resilience and long-term potential.
From bigger picture to unique impacts
There are other means by which European companies can avoid or alleviate the possible fallout from an international trade war. One is to have localised production around the world.
Several of the businesses in our fund stand to benefit from such a strategy. Among them is Mersen, a specialist in electrical power and advanced materials, which has a market capitalisation of around £420 million.
Founded as Carbone Lorraine in the late 19th century, Mersen remains headquartered in France. Yet it boasts more than 50 industrial sites and 18 R&D centres spread across 33 countries – including, crucially, 10 facilities in the US.
Overall, according to our own calculations, exports to the US account for just 6% of our holdings’ total sales[5]. This should mean any impact from tariffs would be negligible.
Of course, the US President is widely acknowledged as the most powerful figure in the world – or at least a close second to Elon Musk. It would therefore be disingenuous to suggest his vicissitudes ought to have zero bearing on investment decisions.
More broadly, the bigger picture is precisely that. It invariably provides a measure of useful context. To that extent, geopolitics and geoeconomics do matter.
In the final reckoning, though, what really counts for investors is how these external dynamics uniquely affect specific companies. Both in Europe and elsewhere, acquiring the insight needed to make sense of this vital consideration is likely to involve digging deeper.
[1] See, for example, BBC News: “Germany and France warn Trump over threat to take Greenland”, January 8 2025 – https://www.bbc.co.uk/news/articles/ckg9gvg3452o.
[2] See, for example, Sky News: “Trump threatens sweeping new tariffs on Mexico, Canada and China on first day in office”, November 26 2024 – https://news.sky.com/story/donald-trump-threatens-sweeping-new-tariffs-on-mexico-canada-and-china-on-first-day-in-office-13260800.
[3] See, for example, Le Monde: “Trump reassures Wall Street by appointing billionaire financier Scott Bessent to Treasury”, November 23 2024 – https://www.lemonde.fr/en/international/article/2024/11/23/trump-reassures-wall-street-by-appointing-billionaire-financier-scott-bessent-to-treasury_6733833_4.html.
[4] See, for example, MSCI: “Small caps have been a big story after recessions”, July 17 2023 – https://www.msci.com/www/blog-posts/small-caps-have-been-a-big/03951176075.
[5] As at January 9 2025. Figure calculated by totalling all companies’ percentage of sales from exports to USA, weighted by individual portfolio weightings.
