It’s taken until March this year for the first big ‘surprise’ catalyst to shake markets. After a strong start to 2023, on a pretty much uninterrupted positive trajectory, European equities could not escape the tarnish indiscriminately meted out to all equity markets in the wake of problems at Silicon Valley Bank (SVB) in the United States.
Before the chaos interjected by SVB, the focus in European equity markets had been substantially driven by Q4 2022 results, which were generally encouraging especially in comparison to US companies, and a brighter than expected economic backdrop; easing inflationary pressures and growth more resilient than expected.
The weather gods were on Europe’s side over winter, with milder conditions taking the sting out of higher energy prices. European companies also received a boost from China’s reopening and the additional uplift it signals for developing economies broadly. Overall, recession worries receded and a relief rally commenced.
Attractive valuations
Providing a helpful tailwind for European stocks is their relatively cheap valuations versus the US. While European equity valuations have risen year-to-date, they remain much lower than their more expensive US counterparts. The MSCI Europe trades on an average p/e multiple of 12.49x forward earnings, compared to 15.15x for the MSCI All World index1. Its average dividend yield is 3.7%, compared to 2.5%. Furthermore, investors remain under-exposed to Europe and so there is room for top-up here. Since the start of the year, US equity funds have suffered US $26 billion in outflows, while Europe has attracted $3.8 billion, according to EPFR data2. Still, there is a long way to go after more than US $106 billion left Europe-focused funds last year, while investors poured US $156 billion into US equity funds.
Looking at a microcosm of European equities, some of the best opportunities for accessing great businesses at good prices falls in the small and mid-cap stocks space, because when markets panic and spikes of volatility hit, the smaller, less liquid, stocks tend to suffer the most. For long-term investors, such as us, that’s a good time to buy.
Recent acquisitions
In the European Assets Trust portfolio, recent acquisitions include the Swedish engineering company Engcon and Switzerland headquartered intralogistics solutions provider Kardex.
Engcon is a world-leading manufacturer of tilt rotators. This is a piece of machinery akin to a wrist, that sits between the excavator arm and the bucket (or whatever tool is used at the end). It allows for unlimited rotation as it can turn a full 360 degrees, optional integrated grab arms (for pipe laying etc.) and extra hydraulic outlets. It can be fitted to almost all excavators on the market and is unique in that it turns the excavator into a multi-purpose machine, which is attractive on a number of fronts.
Multi-purpose inspired efficiencies
The ability to excavate at an angle but from a level and stable operating position is a superior safety feature. It also enhances efficiency in several ways. Firstly, because fewer machines are required to do a job (i.e. a separate machine to operate at an angle is not required) it is a more environmentally friendly option from the point of view of the number of machines manufactured, one machine instead of say three. The reduced need to move an excavator to swap for a different machine means less environmental impact from fuel consumption. The ability to dig around obstacles and in tight spaces also reduces the need to move obstructing objects. Finally, there are productivity gains from the machine staying in one place and kept working rather than moving machines back and forth for different operations.
Engcon has dominant market share in Scandinavia where ~90% of excavators use a tilt rotator but globally its penetration is low making for a potentially huge opportunity. It has attractive financials in the form of a strong balance sheet, good margins and cash generation.
Re-shoring and supply chain security
Switzerland-based Kardex group is a leading provider of automated storage solutions and material handling systems. Its core business franchise is benefitting from the long-term trend towards automation and efficiency with intralogistics (integrated automation and management of the logistical flow of information and physical materials). It manufactures and supplies systems to industry, offices, and warehouses. Its physical products include basic commodities such as file folders and labels to more complicated products such as mechanically operative shelving systems, vertical lifts and rack systems.
With increasing reshoring and companies looking to prioritise supply chain security, demand for Kardex’s products and systems is growing. The positive medium-term growth outlook and shares that had recently de-rated, in the growth stocks sell-off, assured us that now was a good entry point into Kardex.
Find out more about European Assets Trust
