Abrdn still sees opportunities in European shares

Ben Ritchie

Investors in European stocks will have to “navigate a more challenging landscape” in 2022 after a “remarkable year” in 2021 — but big opportunities can still be found.

That’s according to Ben Ritchie, head of European Equities at Edinburgh-based asset management giant Abrdn.

Ritchie said: ” … the returns prospects will still be very respectable for those European investors prepared to be selective and back those companies with the ability to grow earnings power” even amid a worsening backdrop.

He said investors should continue to focus their attention and capital on businesses “that can deliver earnings, cashflows and dividend growth” and that means companies “with strong competitive positions, pricing power and access to structural growth drivers.”

Investors may be prepared to tolerate higher valuations of stocks in return for greater confidence the company can deliver profits, cashflows and dividends.

Abrdn, which manages and administers £532 billion of assets around the world, believes over half of European firms are in sectors “that should be able to sustainably grow in more difficult markets” while delivering resilient profits.

“Areas such as healthcare, consumer goods and even financials offer plenty of opportunities for investors looking for compelling long-term prospects,” said Ritchie.

“Examples include Deutsche Boerse, Pernod Ricard and (Italian hearing aid retailer) Amplifon.

“These businesses are largely driven by structural trends rather than cyclical ones.

“In our view, they should therefore prove more resilient in more challenging operating environments.

“Looking closer, we believe Deutsche Boerse is well placed as the market shifts to on-exchange trading and as demand for data grows.

“In our opinion, Pernod is able to access the rise of the middle classes in emerging markets, particularly in Asia, which remains a powerful structural support.

“Consumers’ ongoing switch to premium beverages is also a positive for companies like Pernod.

“Meanwhile, in our view, Amplifon benefits from an ageing global population, increasing penetration of hearing aids and the opportunity to consolidate a fragmented market.”

Ritchie said annualised economic growth will slow as year-on-year comparisons become more challenging following a period of stellar economic growth.

“At the same time, policymakers are gradually withdrawing the significant monetary and fiscal support enacted during the height of the pandemic,” said Ritchie.

“Input costs (e.g. commodities and freight) have climbed dramatically. Supply chains have been put under huge pressure.

“This has made operations more difficult and resulting in inefficiencies, driving inflation and hampering growth in some sectors.

“Wage pressures have also become more visible alongside extreme dislocations in energy markets as the push towards net zero accelerates.

“This has affected profitability in many sectors, notably industrials and consumer staples. Many businesses have indicated that these issues could persist well into 2022.

“Expectations for inflation to run above target into next year have also gained traction.

“This has created an even more complex puzzle for central banks. Slowing growth in China, one of the key engines of global growth, will factor heavily in their calculations.

“The country’s ‘Zero Covid-19’ policy has weighed on its economy.

“The turmoil in the Chinese property market, and implications for sentiment around demand, has exacerbated matters.

“On top of all this, concerns around Covid-19 have mounted, due to the emergence of the Omicron variant.

“While it’s too early to say, this may result in additional restrictions on daily life, serving to mute economic activity …

“Despite this long list of concerns, we believe most European companies should be able to manage these factors.

“Many firms have already invested in strengthening their supply chains. Businesses have had to upgrade or revamp their operations during lockdown.

“A host of companies have emerged stronger as a result. This includes those that took market share from faltering rivals.

“Nonetheless, we believe investors should continue to focus their attention and capital on businesses that can deliver earnings, cashflows and dividend growth.

“That means companies with strong competitive positions, pricing power and access to structural growth drivers.

“Those with the ability to return excess capital to investors should also find themselves in demand.

“That’s not to say the task will be easy.

“The very real prospect of rising interest rates means investors need to ask questions about the valuation multiples they are paying.

“In general, companies that are more likely to deliver on earnings tend to come with richer valuations.

“Investors may therefore need to choose between earnings risk and valuation risk.

“Our hunch is that they will opt for the latter.

“In the current climate, many will be prepared to tolerate higher valuations in return for greater confidence the company can deliver profits, cashflows and dividends.

“One of Europe’s often unsung attributes is its healthy number of companies with these characteristics.

“By our calculations, over half of European firms are in sectors that should be able to sustainably grow in more difficult markets, while delivering resilient profits.

“This broad exposure compares favourably with the US.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.