# European Equities Outlook 2023: Fidelity focuses on balance sheet strength and pricing power (LON: FEV)

- Link: https://www.directorstalkinterviews.com/european-equities-outlook-2023-fidelity-focuses-on-balance-sheet-strength-and-pricing-power-lon-fev/4121095847
- Published: 2023-01-03T07:30:59+00:00
- Author: Giles

Sam Morse, portfolio manager of the **[Fidelity European Trust plc](https://www.directorstalkinterviews.com/company/fidelity-european-trust/fev.l)**(
[LON: FEV](https://www.directorstalkinterviews.com/company/fidelity-european-trust/fev.l))
assesses the outlook for regional equities in an article titled ‘A focus on resilience
in Europe’. Although corporate profits might yet come under pressure, he believes
the market has discounted much of the bad news, and there is a sense that the worst
may already be priced in.

Key points

 * He believes the outlook for European equities remains uncertain and conventional
   wisdom suggests that corporate earnings could be the next to fall.
 * However, he thinks much of this is already priced into markets, which often look
   six months in advance and can sometimes start to recover before earnings reach
   the bottom or the economy starts to recover.
 * Ultimately, it is impossible to predict the direction of the market, and we will
   continue to focus on attractively valued companies with strong balance sheets
   that should be resilient, and able to grow their dividends, in a more difficult
   economic environment.

The European equity market has fallen considerably from its high in early January,
especially if you recalibrate into US dollars and look at it in real terms. Earnings,
however, have held up better so far, supported by a weak euro. The typical market
narrative is that the earnings shoe is about to drop and, when it does, the market
will see another lurch down. The market has, of course, already discounted much 
of this bad news. Ultimately, we never know when or why the market bottom will be
hit, but often it arrives inexplicably early (some months or quarters before the
economy or earnings recover). The sense that the worst is already priced in is particularly
true in today’s market, which has anticipated a recession and a decline in earnings
for some time. As such, we may be nearing the end of the discounting phase – although
exactly when that will be is very hard to call.

**What could surprise markets in 2023?**

When sentiment is so depressed, maybe one should consider what might go right? Many
bulls say it’s simple: it’s all about the Fed. A pivot, perhaps, to a less aggressive
tightening stance once inflation appears more under control?

Others might point to geopolitics: there remains a chance that a peace of sorts 
will be hashed out in Ukraine. Maybe China will come roaring back as monetary and
fiscal easing combine with an end to the zero Covid policy? Or perhaps European 
governments will support consumers with more fiscal generosity.

The one reliable prediction is that we should expect the unexpected. In the words
of Fidelity’s Peter Lynch: “nobody can predict interest rates, the future direction
of the economy or the stock market. Dismiss all such forecasts and concentrate on
what’s actually happening to the companies in which you’ve invested.” This is precisely
what we will continue to do as it gives us the best foundation to respond to the
unexpected.

**Positioning for what lies ahead in 2023**

Our portfolios remain balanced in terms of sector positioning and our focus is on
finding attractively valued companies with good prospects for cash generation and
dividend growth over the longer term. Our positioning is driven by opportunities
at the individual stock level rather than by macro developments, as we believe that
calling the bottom of the market is a difficult and often impossible task.

We have, however, started to cautiously increase our exposure to some companies 
that have performed poorly recently and now look particularly attractive. This includes
some companies in the financials and industrials sectors that have the potential
to do well in a cyclical recovery but have the balance sheet strength and pricing
power to weather any macroeconomic uncertainty. Conversely, we are wary of companies
that have historically demonstrated limited pricing power and are therefore more
exposed to margin pressure, as well as those that are overly leveraged and could
struggle as interest rates continue to rise. 

The portfolios’ outperformance this year has broadly been in line with our expectations,
given that our focus on high quality businesses means the portfolios tend to do 
relatively well in weaker macroeconomic environments and typically outperform in
falling markets. We have also benefited from takeover bids for two of the portfolios’
holdings.

| **PAST PERFORMANCE** | 
|   | Nov 2017 – Nov 2018 | Nov 2018 – Nov 2019 | Nov 2019 – Nov 2020 | Nov 2020 – Nov 2021 | Nov 2021 – Nov 2022 | 
| Net Asset Value | 0.3% | 16.7% | 9.5% | 21.5% | 1.0% | 
| Share Price | -1.9% | 21.7% | 10.5% | 19.7% | 3.2% | 
| FTSE World Europe ex-UK Index Total Return | -4.6% | 13.7% | 7.3% | 15.7% | -2.9% | 
|   |  |  |  |  |   | 
| **Past performance is not a reliable indicator of future returns**. | 
| Source: Morningstar as at 30.11.2022, bid-bid, net income reinvested. ©2022 Morningstar Inc. All rights reserved. | 
| The FTSE World Europe ex-UK Index Total Return is a comparative index of the investment trust. |

Although this could simply be seen as good fortune, we do think that it is indicative
of the fact that we tend to hold good quality companies trading at attractive valuations.
Other portfolio holdings that have performed well this year have been those that
are beneficiaries of rising interest rates and higher commodity prices, or those
that have strong pricing power and have seen demand hold up.

Balance sheet strength and pricing power are two key elements that we have been 
focusing on over the past year and will continue to do so in 2023, with a particular
focus on the underlying fundamentals of a business and the ability to weather a 
weaker demand environment.  

**[Sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
considerations**

We expect sustainability to continue to play an ever-increasing role in influencing
asset flows and share price returns. Europe as a region typically has high standards
of governance when compared to other markets and, within this, the portfolios screen
well – around 90% of the portfolios are rated A or higher by MSCI as of the end 
of September 2022.

Our focus on the sustainability of dividends typically leads us to favour the types
of companies that are highly rated on ESG and sustainability grounds, as companies
that exhibit sustainable growth characteristics and pay attractively growing dividends
tend to have good business practices.

**Fidelity European Trust PLC (LON: FEV)** aims to be the cornerstone long-term 
investment of choice for those seeking European exposure across market cycles. The
Trust invests predominantly in continental European equities (and their related 
securities) and up to 20% of gross assets may be invested in companies outside of
the continent. It follows a consistent bottom-up approach, seeking to identify companies
able to grow dividends over a three to five-year horizon, irrespective of the economic
environment. The portfolio of stocks is fairly concentrated at between 40 to 50 
diversified stocks with no bias to a particular sector or company size.

**Important information**

Past performance is not a reliable indicator of future returns. The value of investments
and the income from them can go down as well as up, so you may get back less than
you invest. Investors should note that the views expressed may no longer be current
and may have already been acted upon. Overseas investments are subject to currency
fluctuations. Fidelity European Trust PLC can use financial derivative instruments
for investment purposes, which may expose it to a higher degree of risk and can 
cause investments to experience larger than average price fluctuations. The shares
in the investment trust are listed on the London Stock Exchange and their price 
is affected by supply and demand. The investment trust can gain additional exposure
to the market, known as gearing, potentially increasing volatility. This information
is not a personal recommendation for any particular investment. If you are unsure
about the suitability of an investment you should speak to an authorised financial
adviser.

The latest annual reports, key information document (KID) and factsheets can be 
obtained from the website at www.fidelity.co.uk/its or by calling 0800 41 41 10.
The full prospectus may also be obtained from Fidelity. The Alternative Investment
Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK)
Limited. Issued by Financial Administration Services Limited, authorised and regulated
by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity
International logo and F symbol are trademarks of FIL Limited. UKM1122/380770 D/
ISSCSO00103/NA

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