European equities may not always grab the headlines, but according to Sam Morse and Marcel Stötzel, portfolio managers at Fidelity European Trust PLC (LON:FEV), the region presents a compelling investment case. Despite macroeconomic uncertainty, they argue that high-quality companies with strong balance sheets and sustainable dividend growth remain attractive long-term investments.
Quality Over Uncertainty
Economic unpredictability is a constant, but Morse and Stötzel emphasise the importance of investing in companies that can weather volatility. “As macroeconomic developments remain unpredictable, we continue to focus on identifying companies with sustainable dividend growth, which should provide resilience in uncertain markets and deliver outperformance over the medium to long term,” they explain.
Rather than being swayed by economic cycles, they favour businesses with pricing power, strong competitive positions, and a proven ability to grow dividends—a strategy that has historically delivered solid returns.
European Companies Go Beyond Europe
While concerns over Europe’s economic outlook persist—ranging from government debt to geopolitical uncertainty—Morse and Stötzel remind investors that European companies are not solely tied to the region’s economy. In fact, two-thirds of benchmark revenues for European-listed firms come from outside the continent.
“Longer-term equity returns are primarily driven by real dividend and earnings growth, not economic growth,” they note. Europe’s global competitiveness, particularly in sectors such as luxury goods, pharmaceuticals, and industrials, continues to attract demand from international markets.
Additionally, the managers highlight how regional stock market leadership changes over time. From Japan in the 1980s to the US more recently, shifting global trends suggest that European equities, currently trading at a significant discount to US stocks, could see a resurgence.
Positioning for Growth
The fund remains overweight in technology and consumer stocks, areas where they see strong potential. While recent volatility in tech has raised concerns, they maintain confidence in leading names such as ASML, citing the long-term demand for advanced semiconductors.
In consumer goods, French luxury giants Hermès and L’Oréal stand out for their resilient dividend growth and enduring global appeal. Despite recent challenges in China, the managers believe the outlook for these brands remains strong.
Conversely, they remain underweight in industrials, noting that many capital goods companies appear to be at peak earnings, with potential downturns ahead.
The AI Revolution: A Key European Opportunity
Artificial Intelligence (AI) presents another exciting investment theme. Rather than chasing the latest AI startups, the managers prefer a “picks and shovels” approach, investing in companies that support AI infrastructure.
One standout is Legrand, a French electrical company that provides critical components for data centres. AI-driven advancements are also transforming industries like software, pharmaceuticals, and financial services, creating new growth opportunities for European firms.
While caution remains warranted given the uncertain macroeconomic backdrop, Fidelity European Trust PLC sees attractive long-term opportunities in European equities. By focusing on high-quality businesses with strong fundamentals, they believe investors can benefit from resilience, dividend growth, and structural trends like AI.
For investors looking beyond the overvalued US market, Europe may be one of the best places to allocate capital in the years ahead.
