Readers of a certain age may distantly recall the glory days of It’s a Knockout, a long-running BBC series in which contestants competed in bizarre physical games while dressed in outlandish costumes. In the 1970s and early 1980s, when it was at its peak, it made for essential teatime viewing.
The inspiration for the show was Jeux sans Frontières, a programme that operated on a significantly grander scale. Rather than pitting Gloucester against Ross-on-Wye on a playing field in Chippenham, it brought together the nations of Europe in exotic settings such as the Roman amphitheatre in Nîmes.
The most celebrated Jeux Sans Frontières game featured men kitted out as giant penguins. They were required to fill buckets of water while flapping around on an enormous turntable. Not least thanks to the spectacular ineptitude of Great Britain’s representative – billed only as “Dougie, a refuse collector from Skegness”1 – the scene was one of total mayhem.
By now you may well be wondering where this is leading. I mention all the above because investors might find themselves similarly bewildered when they survey the landscape of European equities.
By way of illustration, consider the events of the past few months. European markets had long been widely perceived as in the shadow of their US counterparts, but then came the fallout from Donald Trump’s genuinely world-shaking “Liberation Day” announcement.
As the US unexpectedly and abruptly fell out of favour, investors rediscovered Europe’s appeal. Germany’s unveiling of a groundbreaking fiscal stimulus package and NATO members’ commitment to raise defence spending were taken as further indications that this was the place to be.
By the beginning of July, however, the picture appeared to have changed again. It was revealed that European stocks’ outperformance had come to an end. The US had caught up and then reclaimed the lead2. Trump then issued the European Union with a fresh threat over trade tariffs3 – and then struck a deal last month4.
Such developments may seem like seismic narrative shifts. We might therefore be forgiven for thinking we are witnessing the investment equivalent of Dougie and his ever-empty bucket careening into the scenery for the umpteenth time, taking the Netherlands, Germany and Belgium with them.
Yet there is a reasonable case for saying none of this really matters. Ultimately, these twists and turns should dramatically reshape how we invest in Europe only if we fail to understand why there is nearly always scope for the region to outperform.
From bigger picture to granular analysis
We might first usefully wind back to the news of renewed US outperformance. What does this actually mean? In this instance, specifically, it means the S&P 500 is once again ahead of the STOXX Europe 600.
Granted, this could be unfortunate for passive investors who prefer simply to track indexes. But it is of strictly limited consequence for those of us who favour diligent stock-picking and active management – and it is of even less concern for those of us who recognise the value that can be found in Europe’s smaller companies.
The key point here is that the macro picture and the headlines to which it give rise are far from the be-all and end-all. Yes, they provide a degree of top-down context, but they should not persuade us to lazily tar everything with the same brush.
We should instead concentrate on identifying businesses that are capable of prospering amid all the noise. European companies with a domestic focus are well placed to tick this box at present, since their lack of involvement in export markets should make them relatively “Trump-proof”.
One of our biggest holdings, consumer goods manufacturer Sarantis, serves as a classic example. Based in Greece, it has a strong presence across Europe, faces little competition from overseas and has virtually no dealings with the US.
Equally, European businesses with extensive geographic reach might also escape the worst of any trade-war-induced volatility. Another of our holdings, Mersen, a specialist in electrical power and advanced materials, is headquartered in France but has more than 50 industrial facilities and 18 R&D centres across 30-plus countries – including 10 sites in the US.
Importantly, the attributes that persuaded us to invest in Sarantis and Mersen are not universally shared among every company in Europe. Each of the businesses in our funds has its own unique characteristics, which we aim to grasp through quantitative and qualitative analysis – including direct engagement.
So it makes no sense whatsoever to infer that Europe in its entirety is on the rise or on the slide – or even somewhere between the two – at any one time or in light of any given occurrence. A bottom-up approach to stock selection reveals quite the opposite.
In reality, there are invariably attractive opportunities out there. Despite surface appearances, the arena of European equities is not as chaotic as one of Jeux sans Frontières’ most unruly skirmishes. But it takes in-depth research and careful selection to discover this truth.
David Walton is manager of the IFSL Marlborough European Special Situations Fund.
