Post-pandemic Investment Opportunities In Europe
After many false starts, Europe is finally emerging from an incredibly difficult 18 months of battling Covid-19. As measured by data compiled by worldometers.info, 19 of the 25 nations with the highest Covid-19 death rates per million in the world were European. This is a startling statistic and brings into sharp focus the continent-wide personal and economic impact of the pandemic. To put it in context, the United States is 20th on that list.
The STOXX 600, a broad measure of stock performance encompassing companies listed on all the major exchanges in Europe, was up 27.58% over the last 12 months as measured by FactSet on June 23. In comparison, the S&P 500 was up approximately 39.9% for the same period. At C.J. Lawrence, we believe this lag in STOXX 600 price performance correlates with the slower rollout of vaccines in Europe and the slower emergence from lockdowns and economic restrictions.
The S&P 500 had recovered from its selloff due to the Covid-19 impact by late August 2020. In comparison, the STOXX 600 bottomed again in late October 2020 as a new wave of Covid-19 infections and shutdowns swept Europe and only sustained a close above its pre-pandemic high in April 2021. From our perspective, the STOXX 600 has been lagging the U.S. stock market recovery by about six to eight months and we believe this represents a potential investing opportunity.
As the percentage of the population vaccinated increases across Europe, C.J. Lawrence expects the economic recovery to accelerate and views cyclical investment opportunities in industrials, finance, infrastructure, transport and logistics, chemicals, and materials as attractive. We believe the best opportunities in these sectors include very large capitalization companies that focus on the export market or that have significant operations internationally. We believe these companies should have pricing power in a growing market, and we view them as a hedge against any potential acceleration in inflation. There are also potential investment opportunities amongst global consumer products and food and beverage companies that could both benefit from increased travel and entertainment expenditures in developed countries and economic recovery in developing countries.
Whereas in the past semiconductor manufacturing equipment has been highly cyclical and subject to fierce competition, we believe that the wide-moat semiconductor equipment manufacturers that are essential suppliers to the chip foundry companies are entering a period of consistent growth that looks more secular than cyclical. It may come as a surprise that Europe has several companies that are prominent or even dominant in this sector.
The demand for essential semiconductor manufacturing equipment – or “tools” as they are euphemistically called in the industry – is being driven by the increasing demand for chips as they become prevalent throughout the economy, facilitating the Internet of Things, AI (Artificial Intelligence), cloud computing, and, increasingly, mobility. The value of chips used in the manufacture of automobiles has soared over the last few years as increasingly complicated entertainment, guidance, and Advanced Driver Assistance Systems are included in cars. The recent shortage in chips by disrupted supply chains negatively impacted economic growth. The increasing complexity of chip innovation and production is driving a more capital-intensive expansion for the foundry industry that expect to endure for several years.
C.J. Lawrence also continues to find investment opportunities in our long-favored tech sectors that have demonstrated durable growth over the last year, despite the pandemic, including companies with exposure to 5G, AI, the cloud, and software/hardware protection against cyber-attacks. We view cyber-attack as an increasingly important area with the Internet of Things becoming prevalent in all areas of our lives and as recent attacks have exposed worrisome vulnerabilities.
In the drug/pharma/healthcare sectors, the demographic trends of Europe, which has an increasingly older population (the median age in Germany, for example, is 47.8 years per the CIA’s World Factbook), and the long-term upward economic trends of developing countries should provide favorable growth opportunities. In the pharma area, we focus on companies with a demonstrated history of commercializing or partnering with others on pipeline drugs in areas with acute demand and with pricing power. Companies that provide cradle-to-market support to drug and pharma companies during the development cycle are also an investable theme over the long-term, in our view, though there has been a spate of acquisitions in this area recently.
We anticipate a very broad investment theme of increasing importance, perhaps the most important over the next decade to be the Energy Transition from a carbon-based economy to a renewable energy-based economy in Europe. Europe was the ancestral home of the carbon-based economy. The coal mines of England, Wales, and continental Europe fueled the Industrial Revolution and set the stage for the development of modern urban life and society as we know it. Today, however, England and Wales have two coal-fired plants that will be decommissioned shortly and most of continental Europe is close behind.
To understand the potential investment opportunity, we believe it is critically important to recognize that the European Energy Transition is not a political issue to be debated, but an accepted policy to be executed over the next 20 years. Because of the regulatory and fiscal policy commitments to the Energy Transition, we expect European-based companies to be at the leading edge of offshore wind, battery development, electric vehicle manufacture, the integration via software and hardware of large amounts of renewable energy into the electric transmission and distribution system or microgrids, and, the holy grail of a high penetration renewable energy system, the economic production of hydrogen for industrial, mobility, and generation purposes.
Solar and wind projects, battery storage, and EVs (electric vehicles) could be some of the most visible aspects of the Energy Transition, but increasing usage of electric motors, heat pump heating and cooling systems, energy efficient prefabricated construction modules for office, commercial, and residential construction are just a few examples of the myriad areas where mature or emerging companies with disruptive technologies or innovations we believe can be successful.
C.J. Lawrence sees long-term investment opportunities in many European-based companies, including but not limited to:
- Solar, wind, and battery project developers, operators, and owners, including large utilities.
- Battery manufacturers.
- Chemical companies – involved in battery chemistry and coating used in battery cathodes and anodes. Working on water treatment and recycling technologies and processes.
- Industrial gas companies – green hydrogen production.
- Software companies.
- Electric motor and control manufacturers.
- Offshore construction companies.
Companies that are prominent in the European Energy Transition will likely also be heavily involved in other markets, including in the United States, as the transition accelerates worldwide.
CRN: 2021-0601-9223 R
The opinions and views of this commentary are that of C.J. Lawrence LLC and are not necessarily that of AAM.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.