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Europe – why focusing on great businesses, not the macro, makes sense

At its June meeting, the European Central Bank’s president, Mario Draghi, sent a clear signal that all is not well with the European economy.
June 2019
Lucy Morris

Lucy Morris

Director, Portfolio Manager, Global Smaller Companies Equities

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At its June meeting, the European Central Bank’s president, Mario Draghi, sent a clear signal that all is not well with the European economy. His decidedly dovish comments, which included the statement that if the outlook for inflation did not improve then further stimulus measures “must” be implemented, sent both bond and equity markets higher. Does this further intervention by the ECB herald a liquidity driven bull market, or will macroeconomic and political concerns drive European equities lower?

Markets are volatile as a result of an uncertain outlook

Germany’s benchmark 10-year government bond yield hit a new record low of -0.33%, meaning investors are willing to pay for the privilege of holding these assets. Long-dated bond yields in France, Sweden and Austria also reached negative territory, whilst in total, almost $12 trillion of investment grade corporate and government bonds now have negative yields. Equity markets have, however, recovered much of the carnage of the last quarter of 2018, but as inverted yield curves are often seen as a precursor to a recession and global trade rhetoric continues to fluctuate, this market performance has been volatile.

Opportunities remain

In light of this uncertainty, we believe there are still plenty of opportunities to be found for those investors with a focused and active approach.
Smaller companies are more agile and can focus on more niche growth opportunities that can thrive irrespective of political and economic challenges. They also offer the opportunity to benefit from the talents of entrepreneurial management teams that can transform businesses, through sensible capital allocation, for the better over a relatively short time frame. So, regardless of the external noise surrounding the region as a whole, smaller businesses can continue to prosper.

A disciplined approach to European small caps

We believe that European smaller companies provide an exciting asset class for long-term investors. The region is hugely diverse and composed of large opportunity set. BMO Global Asset Management has an experienced team dedicated to European small caps that leverage from a global research resource.
Our portfolios are high conviction, consisting of what we determine to be the 40-60 best European small cap ideas, offering scope for long-term capital growth for our investors. Stock selection drives portfolio composition, with a clear focus on ‘quality’ businesses and a disciplined approach to valuation. We ensure we are cognisant of risk factors and will look to avoid the permanent impairment of capital, with explicit consideration towards liquidity. We hold only listed, publicly-traded assets.
That is why we don’t base investment decisions on economic and political news flow and focus on uncovering great businesses, run by capable management teams, and invest in these companies at attractive prices with the belief that over the longer term this will deliver good returns for our investors.

Tomra- long-term growth delivering a positive environmental impact

Greater awareness of its negative impact means that pressure continues to build around moving towards more sustainable use of plastic and the disposal/recycling of related waste. Norway’s Tomra looks well placed amidst this trend as deposit orientated recycling solutions gain traction thanks to government led regulation. The European Union has voted for stricter legislation around single use plastic and expressed a desire for 77% of bottles to be collected by 2025 and 90% by 2029.
An experienced and proven management team have guided Tomra into a strong competitive position with around 70% market share in plastic collection via its reverse vending machines and leading technology for waste sorting and recycling. Impressive growth rates and profitability have helped its shares perform exceptionally well over the last 12 months and, in our view, the business looks well placed to grow from here.

Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.
Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.

Related capability

European Equities
EMIX Europe total return index
BMO European Smaller Companies ex UK performance
A table with Cumulative perfomance and Discrete performance
Source: BMO Global Asset Management based on global close prices, 31 May 2019, in GBP, all fund performance data is net of management fees. Benchmark: EMIX Smaller European Companies ex UK TR.
The discrete performance periods are to 31 May each year. Source: BMO Global Asset Management, global close prices. Fund launch date is 16.03.15. Performance data is in GBP £ terms. Investors should be aware that past performance should not be considered a guide to future performance. All fund performance data is net of management fees.

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