European companies finding global growth opportunities

Europe’s economic trajectory may be unexciting, but European stock markets have never relied on the region’s growth to succeed.¹ In reality, European companies may be exposed to high-growth sectors across the world.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Europe is likely past the worst of its economic downturn.² Inflation and expectations for inflation have fallen sharply. Inflation for September came in below expectations, at just 1.8%.³ This has enabled the European Central Bank (ECB) to cut interest rates twice over the last six months, with more interest rates forecast for the months ahead.⁴

This is an improving backdrop, but the mature economies of Europe are never likely to match the growth trajectory of, for example, parts of Asia. But when investing in Europe, it is not necessary to rely on positive macroeconomic factors to generate returns in the region, as long as they are sufficiently selective on the companies they choose.

The European macroeconomic environment is no guide to the opportunity set for European companies. The exact levels vary, but estimates suggest that around 60% of revenues from companies in the MSCI Europe ex UK index are generated outside of Europe.⁵ This may be increasing. BlackRock research suggests more than 50% of European companies have increased their international revenues since 2010.⁶ In reality, the health of foreign economies, particularly the US and Asia, is just as important for European companies as the health of the region’s domestic economies.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

European companies benefiting from global growth markets

There are high growth markets within the global economy from which European companies can benefit. For example, global infrastructure spending is rising. McKinsey has discussed an ‘infrastructure gap’, whereby the world invests US$2.5 trillion annually in transport, power, water, and telecom, yet needs to invest $3.3 trillion annually just to meet its growth forecasts.⁷ McKinsey also says that meeting net-zero targets will require spending $9.2 trillion a year on physical assets between now and 2050, up from $3.5 trillion today.⁸

Governments across the world are driving investment in infrastructure development. They need the support and help of the private sector to meet their goals. This is creating opportunities for European infrastructure and construction businesses globally.

How AI is driving growth

Artificial intelligence has been the stand-out growth story of 2023/2024 with the launch of Open AI’s ChatGPT in November 2022.⁹ The world is still looking at how it will change business operations, alter work and leisure habits, but its impact could be as big as the Internet. This has prompted a wave of investment in AI infrastructure from companies.

There have been a number of beneficiaries of this global trend. AI development is creating rising demand for data centres, for example – hubs that store and interrogate data to create the analytics for AI. Property analytics group CRBE says data centre growth is currently running at 24% in the US, 20% in Europe and 22% in Asia.¹⁰ It believes this is likely to accelerate across all markets in the year ahead.

It says: “Artificial intelligence (AI) advancements are projected to significantly drive future data centre demand. High-performance computing will require rapid innovation in data centre design and technology to manage rising power density needs.”¹⁰

AI is also creating new demand for semiconductors. In 2023, the EU passed the European Chips Act, designed to reinforce the region’s technological sovereignty and double its market share in semiconductors to 20%.¹¹ It seeks to build up the semiconductor ecosystem in the EU, and ensure the resilience of semiconductor supply chains. The Act allocated $47bn to support the sector’s growth,¹² which in turn supports investment in the semiconductor industry. European companies have been able to benefit from the growth of semiconductor demand worldwide.¹²

Luxury Goods: Global growth for European companies

Luxury goods – one of Europe’s largest sectors - are exposed to the growth in Asia. Asia is the world’s fastest growing region, with GDP rising 5.4%.¹³ This is creating a flourishing middle class, with a growing appetite for luxury goods. While some of these are sourced domestically, European luxury brands have proved popular with Asian consumers. The World Economic Forum suggests that an additional 1.5bn will join the middle class by 2030.¹⁴ This should continue to provide support for the growth of the European luxury goods sector.

It is estimated that Chinese customers will account for 35-40% of the personal luxury goods market by 2030.¹⁵

Asia is not the only story in luxury goods. There are still important luxury goods markets in the US and Europe. The difference is that these markets are relatively static; Asia is a source of incremental growth.

It is a similar picture for the pharmaceutical sector, where breakthrough drugs such as the GLP-1s can find huge markets. These drugs have come to market and are producing dramatic results in the treatment of obesity. A number of European healthcare companies have a strong pipeline of growth across the world as they tackle these important healthcare needs. The US is arguably the largest market for these treatments.¹⁶

The BlackRock approach

Of course, there are companies that rely on economic growth to make progress. There will be times in the market cycle when it is right to buy economically sensitive areas. However, timing when to move in and out of these companies is very difficult. Economic growth can be capricious, and markets will often not respond in the way investors expect. Our skillset on the BlackRock Greater Europe Investment Trust is to analyse the fortunes of individual companies, not to try and predict how the European economy might rise and fall. As such, our focus is always on understanding the trajectory for individual companies and the markets in which they operate.

The opportunity in Europe doesn’t come from its economic growth, but from its companies, these companies are exposed to high growth markets all around the world.

¹ FT – Investors grab European equities to gain cheap US exposure – 5 Oct 2024
² European Commission - Spring 2024 Economic Forecast: A gradual expansion amid high geopolitical risks - 15 May 2024
³ Eurostat - Euro area annual inflation down to 1.8% - October 2023
⁴ Reuters - ECB will probably cut rates in Oct on risk of too low inflation: Villeroy - October 2024
⁵ Robeco - The stars align for European Equities - 14 August 2024
⁶ BlackRock, European Equity Barometer
⁷ Mckinsey Global institute - Bridging Global Infrastructure Gap - February 2024
⁸ Mckinsey Global Institute - Capital projects are critical for a green future - August 2023
⁹ The Big Picture - 2024 Generative AI Industry Outlook - November 2023
¹⁰ CRBE - Global data center trends - June 2024
¹¹ European Commission - European Chips Act - January 2024
¹² CNBC - Europe approves its $47bn answer to Biden’s Chips Act - 19 April 2023
¹³ Merck - Billions for the industry: will the European Chips Act secure Europe’s semiconductor future? - 5 June 2024
¹⁴ The IMF - The Global Economy in a Sticky Spot - July 2024
¹⁵ WE Forum - This chart shows the rise of the Asian Middle Class - 13 July 2020
¹⁶ PR Newswire - Global luxury market projected to reach €1.5 trillion in 2023 - 14 November 2023
¹⁷ National Institute of Health - Obesity statistics - October 2024

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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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