Sweeping generalisations rarely serve investors well – especially in Europe. Amid shifting narratives and mixed macro signals, the continent remains rich in opportunity for those prepared to look beyond the headlines. David Walton, Manager of the IFSL Marlborough European Special Situations Fund, explores why a company-by-company approach is key to uncovering the region’s real investment truths.
In A History of Western Philosophy, first published in 1946, Bertrand Russell describes the moment in which truth “appears in a sudden glory”. “The nearest analogy is first walking all over a mountain in a mist, until every path and ridge and valley is separately familiar,” he says, “and then, from a distance, seeing the mountain whole and clear in bright sunshine.”
We might usefully bear this image in mind when surveying Europe’s investment landscape. By any standard, there is a lot of mist and a veritable abundance of paths, ridges and valleys. It is the all-illuminating sunshine that remains in short supply.
This is because the overall situation is extremely complex. As a result, anyone claiming an ability to discern some sort of overarching, unifying “truth” in the bigger picture is likely to be sadly mistaken.
For example, a popular narrative until recently was that Europe represented a notably unappealing investment destination, with the US far worthier of attention. This was by no means true.
By contrast, it has been suggested of late that Europe has become the place to be, with the US tumbling out of favour. Although supported by surging inflows, very strictly speaking, this argument is also not true.
In addition, one school of thought holds that Germany’s plans to boost spending on infrastructure and defence will fuel growth across the continent, while another maintains that the ongoing fallout from President Trump’s trade policies will instead restrict economic expansion. How can both of these contentions be true?
All this is less the stuff of a mere mist and more the source of a full-blown pea-soup fog. We would perhaps get much closer to Russell’s ideal of a “whole and clear” view if we acknowledge a couple of significant points.
First, there have long been grounds for investing in Europe. This is not a development that has happened overnight, even though the events that followed Trump’s chaos-inducing “Liberation Day” announcement might have indicated otherwise.
Second, it is unrealistic to assert Europe in its entirety is now poised to experience either more or less growth. All things considered, the impacts of the various dynamics currently at play are likely to be conspicuously uneven.
So when we step back and gaze at the European investment mountain, patiently waiting for the clouds to lift, we should not expect the kind of revelation Russell longed for. The bigger picture might actually be a distraction in this instance, because there are multiple “truths” hidden in all those paths, ridges and valleys – not least in the form of the region’s smaller companies.
Generalisations versus specifics
Historically, smaller companies have frequently outperformed their larger counterparts over time. This has been the case not just in Europe but in many areas of the world. They tend to be more innovative, more agile and better able to seize emerging opportunities.
During the past few years, particularly since the ravages of COVID-19, many have also shown impressive resilience. They have survived – and even thrived – against a backdrop of high interest rates, soaring inflation, elevated financing costs and macroeconomic uncertainty.
Yet it seems safe to say such attributes have never been in evidence right across a specific industry, sector or country. Rather, they have been present – or not – at the most fundamental levels within individual organisations.
This underlines the value of assessing businesses on their own distinctive merits rather than relying on sweeping assumptions or inferences. Europe rarely lends itself to generalisations, which is why in-depth research and direct engagement can play a major role in constructing sensibly diversified portfolios.
As a fund that specialises in European smaller companies, we look for businesses that are able to benefit from sound management, proven operating models and a capacity for long-term growth. Importantly, despite Europe being catapulted back into fashion, there are also plenty of relatively low valuations still to seek out.
Many of our holdings are likely to be spared the worst impacts of trade tensions, regardless of how the Trump tariff saga ultimately unfolds. Here, again, unique characteristics are key.
Some companies, such as Greece-based consumer goods manufacturer Sarantis, have a strong domestic focus. Others, such as France-headquartered advanced materials producer Mersen, may derive a measure of security from having facilities in the US and elsewhere.
We also hold companies with a global outlook. Among them are Italy’s B&C Speakers, which makes components for high-end loudspeakers, and Swedish industrial group VBG, which is a leader in the field of trailer couplings.
Irrespective of short-term noise, we retain faith in these businesses. We do so not because we think all of Europe is on the up – less still because we think all of the US is on the slide – but because we invest on a company-by-company basis and believe our process is conducive to fully informed decisions.
There is no doubt that a mountain is a sight to behold when viewed from afar. As Russell implied almost 80 years ago, though, the truth is that the only way to really appreciate its myriad attractions and challenges is to climb it first.
David Walton is manager of the IFSL Marlborough European Special Situations Fund.
