- Equity Portfolio Manager
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The power of local perspective
In the third article in our series on the power of local perspective, we assess why today’s environment for European equities offers contrarian investors the potential to uncover the likely long-term winners currently being overlooked by a market focused on macro and political dynamics — an approach we think investors may find increasingly compelling as we steer through continued volatility and structural change.
Against a backdrop of ongoing economic and geopolitical uncertainty, European equity markets are likely to experience continued performance dispersion throughout 2025 and beyond, with macroeconomic and political headlines propelling further volatility. Will there be a peace deal in Ukraine? What will the impact of US tariffs be? Could a Chinese recovery stimulate export demand for Europe? How will the UK stave off the risk of a prolonged period of stagflation? These are a just some of the numerous macroeconomic and geopolitical questions that investors are currently grappling with.
In our view, the resulting market volatility obscures fundamental differences between regions, sectors and stocks and creates a fertile environment for contrarian stock pickers to seek out attractively valued investment opportunities in European equities.
The merits of a focused, contrarian approach
Uncovering these opportunities requires a deep understanding of the impact broader trends may have on the individual companies and sectors in which they operate and, above all, a focus on accurately assessing the long-term health of companies’ balance sheets — including their associated long-run growth potential — amid a hard-to-navigate geopolitical, economic and regulatory environment. A key part of this emphasis on fundamental balance-sheet strength is identifying potential earnings tailwinds that aren’t related to the vagaries of the economic cycle and have as little dependence on the external environment as possible. We believe companies that benefit from such tailwinds are likely to outperform even if they are currently out of favour because of wider risk aversion or negative investor sentiment towards their broader sector.
The opportunities we’re currently seeing in a range of European equities highlight the potential for such an approach to uncover businesses with strong long-term tailwinds and solid balance sheets, and where the customers they rely on aren’t dependent on borrowing money to buy their products or services. For example, in the relatively defensive food ingredients and medical diagnostics sectors — where we have made a number of investments — the potential continuation of the dramatic rise in diabetes cases (Figure 1) and associated health conditions is, in our view, a significant, long-term performance tailwind.
Figure 1
- Investing in healthier food ingredients
The food sector is undergoing a period of significant change, and we view a number of companies in the sector as underappreciated and undervalued — consumers stocked up on food supplies in response to the COVID pandemic and at the start of the Russia/Ukraine war but food shares subsequently became undervalued when consumer stock levels fell back. In addition to attractive valuations in the sector, we expect a number of companies — particularly in the food ingredients business — to benefit from the tailwind of consumers becoming increasingly thoughtful about making food choices that aid the transition towards a healthier lifestyle and reduce, for instance, diabetes risk.
We’ve invested in a number of these companies where regulation and evolving customer preferences are leading to reformulated products with lower saturated fat, lower sugar, lower salt and more added fibre. One such company is a global leader in both low calorie sweeteners and added fibre in food — which helps to improve texture and reduce calorie intake by making consumers feel fuller for longer. We expect increasing demand for healthier ingredients to continue to drive sustainable growth in the business.
We view proactive, on-the-ground engagement as crucial for gaining first-hand insights into a company’s sustainability credentials given their significant impact on financial performance and competitive position. This company has a strong record in this area — in the last five years, its low and no calorie sweeteners have enabled 9.0 million tons of sugar to be removed from people’s diets, which is equivalent to 36 trillion calories.
- Focusing on better eyesight
Several factors have significantly increased the incidence of myopia and other sight-related issues and led to higher demand for treatment — not least, rising cases of diabetes, the ageing population globally and increasing use of screens and mobile devices. The World Health Organisation predicts that the number of people over the age of 60 will more than double by 2050 and, according to estimates by the American Academy of Ophthalmology, the global prevalence of myopia is expected to double between 2000 and 2050.
One of the companies that we expect to benefit from these demand tailwinds is a world leader in contact lenses and surgical eye equipment. Medical technology spin offs like this company have a history of strong outperformance over time and we view it as a defensive, stable grower with high-quality leadership.
We think the business was an undermanaged asset under its previous ownership and we see significant potential for durable growth and market share gains operating as an independent company. It is investing in a number of innovative products to drive revenue growth, including a system to enable cataract surgeons to operate with improved safety features and on a higher throughput of patients, and a first-in-class drug that stimulates natural tear production to treat dry eye, which affects around 720 million patients globally.
Long-term opportunities for patient investors
These examples highlight the opportunities we’re currently seeing in attractively valued stocks with solid growth prospects, not just in the health care and food sectors but also in construction, defence, industrials and more. In each case, a long-term mindset is key. Uncovering quality companies that are temporarily out of favour but that have high growth potential requires the patience to hold them for a long enough period for fundamentals and sentiment to improve. For patient investors willing to look through today’s volatility, we believe the rewards of a contrarian, bottom-up investment approach will be worth the wait.
