European equity, Jeanmaire (Columbia Threadneedle): ‘A structural strength beyond the end of US exceptionalism’

The house manager sees solid economic fundamentals, a more diversified market and new growth sectors in EU stocks. From industry to finance, here's why Trump's tariffs are not scary and what his CT (Lux) Pan European Focus fund is focusing on

by Giulio Zangrandi

The debate over American exceptionalism never ceases to divide global investors: after a decade of almost undisputed leadership, the outperformance of the US stock markets has shown signs of fatigue, and the spotlight has shifted to the other side of the Atlantic. But if for many the primacy of Europe is only temporary, as Wall Street's rebound in recent weeks would demonstrate, there are those who still believe that it is a structural change in the geography of equity investments. These include Frédéric Jeanmaire, fund manager at Columbia Threadneedle Investments, according to whom the outlook for the Old Continent is increasingly rosy. FocusRisparmio caught up with him to expand on his view and understand how the Fund under his management operates: CT (Lux) Pan European Focus.

What is the outlook for European equities?

We are positive, because the Eurozone economy is well positioned. Interest rates are falling, and the new German government has loosened restrictions on public debt: this means stimulating domestic growth, which benefits all the other countries in the bloc, but also infrastructure and defence spending, with positive knock-on effects on multiple sectors. Moreover, consumers seem to be in good health and continue to benefit from the savings accumulated during the pandemic.

And what about US tariffs? Is the danger avoided, or will there be repercussions, for example through new inflationary pressures?

I do not see any particular threat on this front. The trade war unleashed by Donald Trump, if anything, risks producing the opposite result in Europe: that is, encouraging deflation. Chinese suppliers will in fact seek outlets in our latitudes to compensate for the drop in sales on the other side of the ocean. Not to mention that a strong euro against the dollar will lower energy costs, further reducing pressure on prices. Where tariffs are likely to drive up prices again, however, is the United States, thanks to the combined effect of the immigration policies adopted by the US administration and their impact on the labour market.

Is the outperformance of European equities a lasting trend or is it a temporary exploit?

There are several reasons to think that this is a structural phenomenon. For example, the outlook for the domestic economy is encouraging, despite the French debt crisis and the historically delicate situation in which Italy finds itself. The composition of the market has also changed for the better. While Europe used to be known mainly for quality consumer brands and a strong pharmaceutical sector, international competition has reversed the situation: the financial sector has a stronger foundation, in a context of banking “risiko” and interest rates that are no longer negative, and industrial companies such as Safran and Legrand have been able to carve out very profitable or rapidly expanding niches. Reinsurance conditions have improved, insurance rates are following the same trajectory, and these companies find themselves operating in more established markets and benefiting from domestic GDP growth.

What is the fund's investment approach?

Our process is predominantly bottom-up: we start with individual companies rather than sectors, although there are sectors where we find good business models more easily and others where the opportunities are more limited. We avoid, for example, oil & gas and traditional utilities or even basic chemicals, while we favour industrial companies that have solid and profitable business models. The technology sector is also of great importance to us, and we give it a high weighting. We adopt a growth-oriented style in relation to the benchmark, which is the MSCI Europe, so we only invest where there are above-average growth rates or good upside potential.

How, specifically, does the selection process take place?

For us, the quality of the business model is crucial, which often cannot be summarised in a series of statistics. That is why, as a first step, we examine the competitive dynamics of the industry using Porter's five forces model and assess the positioning of each company in terms of its competitive advantages: from strong brand to proprietary technology and size. We are interested in finding companies with a business capable of generating high returns, producing maximum value and protected by barriers to entry. Companies undergoing transformation can also be attractive, especially when acquisitions or a change in management promise to propel them towards higher growth and valuations. Finally, in important niche markets, it is possible to find companies that can achieve above-average returns and where entrepreneurial skills are rewarded. As far as quantitative data is concerned, we consider several parameters, but what we look at with most interest is the tendency to generate free cash flow per share.

Can you give a concrete example of a stock in your portfolio?

Safran, a French aircraft engine manufacturer, is a case in point: it operates in a concentrated market with high entry costs and stable revenues from after-sales service. Another example is the Danish logistics group DSV: its core business is cargo transport with a low capital-intensive model, in which the company rents containers and organises their filling for customers and transport to the end market, and it recently acquired DB Schenker in a deal that offers strong synergies but also growth prospects thanks to the introduction of a more dynamic management.