Fidelity European Trust plc (LON:FEV) portfolio manager Marcel Stötzel believes European equities offer attractive investment opportunities, despite ongoing economic and political uncertainty across the region.
Speaking to Morningstar, Stötzel discussed the outlook for European markets, the investment themes shaping the portfolio and the companies he believes are positioned to benefit from structural changes across technology, artificial intelligence, energy infrastructure, pharmaceuticals and defence.
Stötzel argued that European equities should not be viewed simply as a reflection of the region’s economic performance. Around two-thirds of the revenue generated by companies in the MSCI Europe index comes from outside Europe, giving investors exposure to businesses competing in global markets.
He highlighted companies such as L’Oréal, ASML, Novo Nordisk and SAP as examples of European-listed businesses with international competitive positions. He also pointed to significant valuation differences between comparable US and European companies, citing GE Vernova and Siemens Energy as an example.
However, Stötzel believes domestic European businesses are becoming more attractive. Increased defence expenditure, Germany’s decision to lift its fiscal debt brake and greater scope for public spending in parts of Central and Northern Europe could provide additional support for selected companies.
The trust continues to favour businesses with strong competitive advantages and long-term growth potential. Stötzel acknowledged that quality growth stocks have faced a difficult period as interest rates increased, but believes valuations have moved too far in the opposite direction.
He highlighted that the trust’s dividend yield had recently reached parity with the wider market, an unusual development outside a brief period during the Covid pandemic. In his view, this creates an opportunity to access quality and growth characteristics without paying the valuation premiums previously associated with these companies.
Artificial intelligence is another area of interest. Although Europe has fewer direct beneficiaries in semiconductor manufacturing and advanced AI models than the US and China, Stötzel believes the region could benefit from the second-order effects of increased AI adoption.
He identified banks as potential beneficiaries, particularly through automation and improvements in operational efficiency. Financial institutions employ significant numbers of people in administrative functions, including know-your-customer checks, which could increasingly be supported by AI.
European utilities and pharmaceutical companies could also benefit as businesses use AI to improve productivity and reduce costs.
ASML remains the trust’s largest holding. Stötzel believes the semiconductor equipment manufacturer has considerable pricing power that has not yet been fully reflected in its commercial performance. The company holds an almost 100% market share in extreme ultraviolet lithography machines, which are required for advanced semiconductor manufacturing.
He argued that ASML has historically been more conservative with pricing than other companies in the semiconductor supply chain. As the value of each wafer increases and customers become larger and more profitable, he believes ASML has scope to improve pricing over the next two to three years, supporting further revenue growth.
Schneider Electric is another significant holding, with its position in data centre infrastructure and electricity grids supporting the investment case. The company provides equipment and services across much of the data centre infrastructure market and has partnerships with Nvidia.
Stötzel believes growing electricity consumption from data centres will increase the need for investment in power grids. Much of the existing infrastructure is between 30 and 50 years old, creating demand for upgrades as electricity requirements increase.
Within pharmaceuticals, the trust has taken a selective approach. Stötzel expressed concerns about declining research and development productivity across the global industry, pointing to clinical trial failures and increased competition from Chinese biotechnology companies.
These concerns contributed to the decision to sell the trust’s holding in Novo Nordisk, although he acknowledged that the sale came later than intended.
Roche remains one of the few pharmaceutical companies where he believes the research and development process is continuing to deliver. Its use of AI and partnerships with technology companies are also viewed positively, although Stötzel stressed that the assessment of pharmaceutical pipelines can change as new evidence emerges.
Defence is another sector receiving attention. Stötzel said the trust did not participate in the initial rally following the Munich Security Conference speech by US Vice-President JD Vance, but believes the subsequent decline in valuations has created opportunities.
He noted that Rheinmetall’s valuation has fallen below the level seen before the speech, despite the expectation that European defence spending will grow faster than previously anticipated.
Rather than investing in Rheinmetall, the trust has been selectively adding exposure to other German defence companies. Hensoldt was recently purchased, with Stötzel highlighting its exposure to defence electronics and its positioning across several areas of the sector.
He identified three characteristics he would ideally seek in a defence investment: significant German exposure, a focus on aerospace and air defence, and exposure to defence electronics and software.
Germany’s expected increase in defence spending, its geographical proximity to Russia and the growing importance of countering drone threats all contribute to the investment case. Stötzel also expects AI to play a greater role in military operations, creating opportunities for companies providing the associated technology and software.
Hensoldt was highlighted as a company that meets these investment criteria, provided its valuation remains reasonable.
Overall, Stötzel’s comments to Morningstar indicate that Fidelity European Trust continues to focus on globally competitive European businesses, while also identifying opportunities arising from increased domestic spending, AI adoption, electrification and defence investment.
