Tom O’Hara, European Equities portfolio manager, discusses his outlook for the asset class in 2024.

Key takeaways:

• The period of deglobalisation which lies ahead will likely be characterised by the capital intensive building of new manufacturing, automation, data centres and reinvesting in infrastructure.
• This will be very powerful in terms of where capital expenditure will be deployed and which companies will benefit from it.
• Europe offers access to global companies at reasonable valuations, many of which are leaders in their field.

Obviously, it’s not a good enough answer for me to say I have no idea. So, thinking more broadly, we can expect more paranoia, more volatility, and more erratic behaviour in markets as everybody obsesses over recession, inflation, and whether interest rates have peaked.

Whether it’s going to be a soft landing or a hard landing, we can expect more turmoil. But I don’t mind that. I’ll use it as an opportunity to buy the companies that I think will succeed not only in 2024, but for the next decade ideally.

The amount of money being spent on building factories in the US right now has reached almost 0.6% of GDP – we’ve not seen that level of expenditure on building manufacturing capacity since 1990.

The significance of this is that before the World Trade Organisation was established (and that’s how I think we need to view this new era that we’re in) this is a generational shift. We had over 30 years of ever-increasing globalisation – sending manufacturing to Asia. But that is now in a period of reversal. Even if it is only a partial reversal, it can be very powerful in terms of where capital expenditure will be deployed and which companies will benefit from that.

Where are the most compelling opportunities in Europe?

First and foremost, investors should not get bogged down in investing in Europe per se. Rather, it is about accessing companies that are listed or are born in Europe, but are actually globally relevant, globally dominant at what they do, leaders in their individual fields. This, combined with some major shifts we’re seeing in the world right now, what I would broadly categorise as a CapEx ‘supercycle’, give us a really good opportunity to invest in global leaders listed in Europe, but [which] are accessing these global themes and the globalisation, the massive amounts of investment in artificial intelligence, cloud computing, all of which I think amounts to a CapEx supercycle.

Yeah, so some of the types of businesses that we think are really interesting right now. You’ve got those businesses that will thrive despite any macroeconomic turbulence. And that sounds like a pun because I’m about to mention aerospace.

That was unintended, but aerospace is very, very resilient. A high growth industry. We’ve got global champions here in Europe. We’ve got Airbus, which is one of the two [major] builders of aircraft globally. We’ve got Safran, which produces the engines for the aircraft. And these are businesses that are basically looking at ten year order backlog.

And then you’ve got businesses that will thrive, perhaps because of this new economic regime that we’re in, specifically higher interest rates. Higher interest rates brings discipline back to industries. And I think there are certain industries that will benefit from that, or more specifically, the powerful incumbents in those industries will benefit from economic rationality. And beer is an example that we like to talk about quite a lot because we also quite like drinking as a team.

AB InBev is the world’s biggest brewer and what they’re seeing is higher interest rates, higher inflation leading to craft breweries, small breweries, many of which cropped up over the last 10 to 15 years during that low interest rate paradigm. They’re going bust. And so the brewing industries re consolidating into the hands of the powerful incumbents that have the industrial scale.

And then thirdly, and finally, it’s about accessing the picks and shovels of this CapEx supercycle. So whether that’s the heavy materials companies that do the groundworks, they do the roads, the highways that can be CRH, that can be Holcim. Whether it’s the capital goods companies that provide the hardware and the software that automates manufacturing facilities, or manages data centers. And it can be, of course, the semiconductor capital equipment companies, which Europe is excellent at.

Actually, it’s a very interesting Dutch ecosystem and these are the guys that provide the machinery needed to produce all of the chips that we’re going to need in abundance in the years ahead.

What is the most important takeaway for an investor in Europe?

What you can access in Europe is global leaders at very reasonable prices as well. Often they trade at discounts to their richly valued US peers.

What you can get through Europe is businesses that are very good at making and doing things. Many of the things that will be needed in this area that lies ahead of us, which is deglobalisation, capital intensive building of new manufacturing capacity back in the Western world, automating those factories, building the data centers, reinvesting in the infrastructure – whether it’s the roads, the railways, the bridges and so on.

We have the companies here in Europe that are not just a play on Europe. They give you access to global themes.

Definitions 

Capital expenditure (capex) – Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment or vehicles in order to maintain or improve operations and foster future growth.

Inflation – The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures.

Macroeconomics – Macroeconomics is the branch of economics that considers large-scale factors related to the economy, such as inflation, unemployment or productivity.

Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.

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