A professional investor tells MoneyWeek where he’d put his money now. This week: Chris Hiorns, associate fund manager, Allchurches European Growth Fund
Despite the strong performance of European equity markets in the past few years, this is still a good time to invest. The outlook for the core European and Scandinavian economies is positive, even though Spain and Ireland – whose economies have previously delivered strong growth – now seem to be weakening as higher euro interest rates hit demand for residential property. The continental European equity markets offer a range of firms that should profit from strong global growth and resurging European domestic demand.
I look for stocks on attractive multiples, operating in growing markets with high market shares, solid balance sheets and producing generous cash flows, which will create long-term value. All of the companies below are leading players in their fields and well placed to benefit from strong growth in the global economy.
Nokia (NOK) is the world’s biggest mobile-phone producer, but the firm has not rested on its laurels and is constantly introducing new features, which will soon include a mid-range satellite-navigation phone using their own software. New features for advanced G3 phones should ensure that Nokia can continue to charge premium prices. And though the mobile-phone market may appear mature in Western economies, the group also holds strong positions in many growing emerging markets such as India. Despite being the dominant player in the industry, it continues to increase market share and raise gross margins, even as its lead rival Motorola has stumbled.
One weakness in Nokia’s business model was its network unit, which supplies equipment for mobile-communications networks. The division was arguably too small. However, following its joint venture with Siemens, it will become one of the top-three players worldwide. Despite having cash on the balance sheet, the company trades at an attractive valuation with a high free cash-flow yield.
After a recent meeting with the management of French firm Carbone Lorriane (PA:CRL), I decided to add to our holdings, as they seem well placed to take advantage of growth in the alternative-energy sector. The group is the world’s largest manufacturer of brushes for electrical motors and the second-largest producer of industrial fuses. While these are largely mature markets, growth opportunities include emerging markets and supplying brushes and fuses to sectors such as wind energy. But the company’s real growth area is as one of the leading suppliers of graphite, where they have ambitious expansion plans. The rapidly expanding solar-energy sector is a voracious consumer of graphite and should ensure strong growth in demand. Graphite is also an integral component of the new energy-efficient LED light bulbs, which should gradually replace traditional light bulbs.
Another French company I like is Schneider Electric (PA:SU), which provides equipment to utility firms for electricity transmission and distribution. It should benefit from the rapid growth of electricity infrastructure in countries in Eastern Europe, as well as Russia, China and India. Its emerging-market exposure is expected to rise from 18% to 30% of sales over the next few years. The company recently acquired US manufacturer APC, which should provide both cost-cutting and cross-selling opportunities. Schneider Electric is currently generating good cash flows, has rising profit margins and an attractive dividend yield.
The stocks Chris Hiorns likes
12mth high 12mth low Now
Nokia 1,290p 979p 1,286p
Carbone Lorriane e51.00 e36.55 e47.89
Schneider Electric e105.93 e70.13 e104.47