While European blue chip stocks recently deflated following a run of outperformance through April 2023, Jay Younger, investment analyst at Aubrey Capital Management, has stressed the importance of looking to the micro upsides rather than the macro downsides in light of recent quarterly results.
Speaking on Asset TV (https://www.asset.tv/video/market-moves-european-macro-update) he said that while the macro backdrop in Europe has not been favourable, it is important to remember the bottom up perspectives.
"What we're seeing is that on our latest quarterly results we had on average sales growth in our portfolio of 24%. We had an average earnings per share growth of 33%. But what was even more reassuring was that we saw the average margin expansion in our portfolio up by 50 basis points, which goes against what we saw this time last year."
Another issue is to understand what is driving performance in the US - which Europe is being benchmarked against. There is significant concentration of the S&P 500 performance in just five stocks: Amazon, Apple, Microsoft, Nvidia and Tesla.
"Only 23% of the S&P 500 constituents actually outperformed the S&P 500. So, when we say Europe is losing momentum, it's important to understand what actually we are comparing that to."
"European indices are dominated by oil and gas, pharms, financials, and they're typically characterised by lower growth expectations. Certainly the tech exposure in Europe, the cyclicals, semiconductor names, for example, are maybe not well represented in the index because they're smaller companies."
Younger added that while Aubrey typically does not invest in financials, the bottom up story in Europe is generally positive in the sector. Currently the manager owns one Danish bank. But banks generally have a tailwind from the prevailing direction of interest rates. Once the direction of rates turns, it may become a different story for the sector.
But knowing when that turn will come is the "million dollar question that everyone wants to know".
There is data that suggests China could be seen currently as a global exporter of deflation, given recent purchasing price index levels there. Inflation in Europe on a CPI basis is high, but Younger referred to purchasing price index data being at a two year low in the region including countries such as Spain and Germany, suggesting inflation is already being dampened. He argued that this type of index is a better measure of inflation than CPI because it includes a broader basket of goods.
He suggested that statements from central banks such as the Fed indicate they may be "hedging their bets".
On valuations, he noted that Europe is cheaper than the US. But for those using the adage of 'short term pain for long term gain' from European stocks, he added that it is important to find an active manager in Europe, which can identify faster growing companies.
Aubrey's approach is to ignore sectors and/or geographic location in the region and focus on earnings growth, cash generation and return on equity of individual companies. With a 95% active share, the European strategy is effectively benchmark agnostic in seeking out prospects.
Europe can offer up such prospects in areas such as making semiconductors and hence data centres run more efficiently, or in areas of electrification such as enabling faster charging.
