What to consider when investing in European equities?
7 AUG, 2024
By Jupiter AM
By Mark Heslop, European equity manager at Jupiter AM
With US elections on the horizon and geopolitical tensions at elevated levels, markets are likely to remain volatile. Softer demand patterns in some industries, as individuals and companies adapt to higher financing costs, are likely to result in pressure on revenues and margins for many companies, especially where recent supply constraints have normalised. In such an environment, firms with fundamental pricing power and structural demand drivers are likely to fare better.
If, as we expect, interest rates and discount rates begin to fall in the US and Europe, it is likely to provide a boost to equity valuations, particularly for high quality growth assets.
Some sectors, especially the semiconductor industry, have some significant headwinds that are likely to allow them to achieve solid growth even as the macroeconomic environment remains challenging.
Those companies with differentiated products, which have pricing power and are well exposed to megatrends will remain the best long-term investment opportunities. These trends include:
- Digitalisation and the need for computing power.
- Relocation of the global supply chain due to geopolitical tensions.
- The transition to a green economy.
- The ageing population and innovation in healthcare.
Overall, we expect the technology sector to be well supported by strong demand dynamics coupled with a political push to relocate critical infrastructure. That said, the technology sector has a wide range of components and stock selection will be important. Faster processing power, facilitated by continuous improvement in chip design and manufacturing, is enabling the development of new software solutions that deliver greater value to the end user. The focus today is on AI, but this is only a continuation of a long-term trend. We expect the companies that supply the world's computing infrastructure to see a sharp increase in activity as more data centres and faster servers are built to support this development. Companies that can now use AI to deliver even more powerful solutions to their customers should also see an acceleration in demand. But we also expect competitive pressures to intensify as increased computing power helps lower the barriers to entry for new competitors.
