Ben Ritchie: Why Europe? Opportunities for income and outlook for 2021
Ben Ritchie, head of European equities at Aberdeen Standard Investments, discusses the growing investment opportunities available in Europe and provides an outlook for 2021.
For many years the narrative on Europe as an investment region has been a tale of caution. The perception of the continent being full of ‘old economy’ businesses has been a reason for investors to take heed. However, there is change on the horizon.
Europe is now a leader in the practice of responsible capitalism. The region is demonstrating that capital markets can be a force for good. This is a function of policy and government support as Europe increasingly takes the lead in the setting of emissions targets and broader green ambitions, most recently demonstrated by the EU Green Deal, which is set to boost the economy through investments into green technologies and the establishment of sustainable industry and technology.
European companies have real strengths in intellectual property that are starting to make a material difference to growth potential. They are well ahead of the rest of the world in new environmental technologies. They benefit from hundreds of years of heritage in the ownership of many of the world’s most desirable consumer brands. Consolidation within the industrial space has created giants in highly profitable, fast growing and defendable niches.
Europe’s historic expertise in manufacturing has left it with a much stronger positioning in business to business technology. Its pain in lagging behind the ‘FAANG’ stocks of the United States and lack of scale in consumer platform businesses is well known. However, Ben sees real change coming as industry increasingly digitalises, which can allow the technology gap to be closed against the United States.
Investing in European businesses can offer investors a rich and varied opportunity, ensuring that when looking for income they are not reliant on just one or two sectors. Including recognised global leaders across different industries, the European Equities team at Aberdeen Standard Investments has found attractive opportunities, such as consumer staples and pharmaceuticals.
Digging a little deeper we have for many years invested in less well researched sectors, such as utilities and insurance. The combination of these ideas has enabled us to generate an attractive premium dividend yield from a range of holdings whose diversity gives us confidence that their dividends will be sustainable even in challenging times.
We are continuously looking to balance premium dividend yields that are sustainable, with companies that are able to rapidly grow their dividends as a result of growth in the underlying business. Getting this balance right, provides us with an attractive blend of downside protection and upside capture.
The European Equities team continues to see opportunities across most sectors in Europe. Technology is a key driver of value creation, and this includes businesses operating online market places and managing financial data that wouldn’t necessarily fall under the technology sector label. Ben Ritchie also sees leadership opportunities in three key sectors namely healthcare, utilities and consumer goods.
Demographics and intellectual property combined with the global reach of many European companies, creates a strong long term growth story in healthcare. In utilities, European players have a strong growth opportunity ahead of them, as they lead the decarbonisation of the economy and they also have the ability to take that technology to an international market place. Within consumer goods, European companies have unrivalled brand heritage and global reach, which can allow them to benefit from access to fast growing markets with high margin brands. Europe’s particular strength comes in the luxury area, where demand from emerging markets remains very strong.
The outlook today is more balanced than at any time we can think of in the past few years. There are reasonable arguments to be made for the pandemic marking the start of a return to inflation, or indeed on the other hand creating longer term deflation. Against this backdrop we are thinking more probabilistically, ensuring our portfolios are balanced to a wider range of outcomes rather than backing any single view.
To that end we have added more cyclicality and interest rate exposure, but crucially without deviating from seeking downside resilience. With a more balanced portfolio we would expect to continue to prosper in more difficult market conditions, whilst also giving ourselves the opportunity to participate a little more in some of the upside scenarios that might develop.
In terms of the outlook for dividends, we think the commentary on dividends will get more bullish throughout the year, setting us up for a strong recovery to be announced with 2021 results.