Polen’s international holdings include Ireland-based Accenture, a permanent in-house consultant for global multinationals that helps them transition to a digital world. Morris notes that 98% of the company’s clients have used it for more than 10 years. Other observers have noted that more than half of Accenture’s clients don’t put their contracts up for bidding when they are renewed.
German enterprise software giant SAP is another Polen holding. Many European businesses are a few years behind American companies in moving their operations to the cloud and, as a result, this high-growth revenue stream could have a long runway for SAP.
Another Ireland-based company that Polen favors is Icon plc, one of the world’s largest contract researchers for the pharmaceutical industry. Icon’s business, which includes assisting drug companies through various phases of drug approval, is growing at double digits, Fields says.
A Most Unloved Sector
Few European sectors are more controversial among professional investors than banking. Virtually the entire yield curve in many countries is in negative territory, loan demand is weak and many banks failed to recapitalize after the Great Recession.
Many banks on the Continent have suspended dividends, either voluntarily or at regulators’ demand. MFS’s Gorham sees that as beneficial for European economies but not shareholders in its banks. Polen doesn’t invest in banks on principle, while BlackRock’s Koesterich avoids them because of their current fundamentals.
For the bold investor who likes cheap stocks, Europe’s troubled banks offer selective opportunities. That’s the view of Causeway’s fundamental portfolio manager Alessandro Valentini, who argues that the current “short-term pain is being priced in indefinitely.”
Markets are handicapping certain banks twice—first because of where they reside and second because they are banks. “This crisis is not a financial crisis,” Valentini says. Several institutions are in far better shape than others and have jettisoned low-return operations.
New management at Italy’s second-largest bank, UniCredit, has raised capital and restructured the bank while dumping non-performing loans. Valentini says this has reduced its cost of equity. “Their loan losses are manageable,” he maintains. “They have built excess capital [and] suspended dividends. Even if interest rates stay low, they can return enormous amounts of capital to investors.”
Another European company Valentini likes is aerospace giant Airbus, which shares a duopoly with Boeing. Both businesses are experiencing serious postponements and outright cancellations of orders for new jets.
But Airbus looks poised to benefit from Boeing’s self-inflicted wounds arising from its troubled 737 Max airplane. Furthermore, Valentini believes Airbus’s jets are more efficient in energy usage and other metrics.
Europe’s recovery from Covid won’t be linear. Some nations like France are experiencing setbacks on the road to reopening. The huge debt and demographic challenges faced by some nations on the Continent rival Japan’s and dwarf America’s. But as JP Morgan’s Santos observes, the nature of Europe’s industrial base, combined with valuations, make a compelling case for investors worried about pricey U.S. equities.