Companies in growth niches offer the best opportunities, suggests JOHCM’s Trygve Toraasen.
In an investment climate dominated by macroeconomic and political developments, individual corporate fundamentals are being ignored. This makes for arduous conditions for bottom-up stock pickers.
Where risk-averse investors have allocated to equities, it is large-cap defensives that have benefited as a perceived safe haven. But amid the barrage of negative headlines surrounding Europe, it is important to remember that the continent remains home to a number of world-class companies that are still enjoying growth there and beyond.
Taking a five-year investment view, we look for companies that operate in a particular niche where growth is high and accelerating. These companies may be domiciled in Europe, but are always regional with the potential to become global in nature, with their growth being driven by expansion of their businesses into fast-growing markets across the world.
Indeed, many of our holdings generate more than one-third of their revenues from Asia, with that revenue stream growing at double-digit rates. Others are active in a particular niche where demand is growing strongly in both Europe and North America.
Swedish radiation therapy company Elekta is a great example. With ageing populations creating opportunities within the medical technology field, Elekta is a direct beneficiary of demographic trends.
Its revenue streams are highly diverse: Swedish sales represent a small proportion of Elekta’s total sales and revenue growth, with about one third being derived from Asia and other markets.
Another growth stock we like is Kongsberg, a Norwegian firm with core activities in maritime, oil and gas technologies, and defence. The company has historically invested heavily in research and development to create leading products, the bulk of which are still in the early stages of their product life cycles.
Kongsberg’s market leadership in these structural growth areas is generating strong revenue and profit margin growth, yet the company trades on a very moderate valuation.