3. Big themes are creating a growth narrative attracting international flows
We continue to believe that climate change, energy transition and the decarbonisation of everything remain the main investment themes of our time. We think Europe is taking a leading role in the fight against climate change and global investors actively seek European investments to increase their exposure to this powerful investment theme.
European companies have already invested significantly in the green economy. The EU recovery fund will add additional ‘fuel to the fire’ as it is specifically targeting the ‘Twin transition’. That is, the transition to a sustainable economy and the transition to a digital economy.
Within our portfolios, we have a lot of exposure to the decarbonisation theme, we see most value in the enablers of this decarbonisation. We like the spades and shovels that enable the energy transition at this point.
We see great opportunities for wind turbine makers and smart LED light producers but also makers of industrial scale compressors needed in hydrogen production, one of the key ingredients in energy transition in Europe.
The second big theme that runs through our portfolios is the digitalisation of everything. As we have noted in previous comments, we see digitalisation driving tremendous growth in the semiconductor industry.
Coming out of the Covid-related demand hiatus and production stoppages in the automotive industries, the semiconductor industry has struggled to meet demand. This has led politicians and the business community to realise the strategic importance of having local production capacity of semiconductors.
In time, this may lead to over supply but for the next few years this will drive significant capacity expansion, which helps semiconductor equipment makers. Within the semiconductor industry, we have reallocated some investments to these equipment makers which we believe are now more reasonably valued, away from the semiconductor companies.
Where we struggle to see value is in the new issuance (or IPO) market. In general, IPOs in Europe are more than fairly valued at the moment. In certain cases, our valuation assessments pointed to significantly lower prices than where the banks placed the stock.
We have not participated in the SPAC market and continue to maintain discipline in terms of valuation in all investments we make. The good news is that some of the hot air has left the bubble, making valuations somewhat more reasonable.
We think we are in a ‘buy on weakness’ market in European small cap rather than a ‘sell on strength’ market. Within a global small cap context, we believe a European overweight is sensible given valuation, earnings prospects as a whole and that the region is likely to be one of the earliest ‘post-covid normalisation’ beneficiaries.
