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At the start of this century there were almost 8,000 publicly traded companies for US money mangers to select from. Today that number is below 3,600. There are a host of reasons for this but the message is clear – successful investors must broaden their horizons and take advantage of the 10’s of thousands of investment opportunities that exist worldwide. The chart below shows Investment Themes by Decade. It is worth noting that no asset class has ever repeated.
Europe is too big to be ignored, a population of 747 million vs 328 million for the US, and valuations we have not seen in over a decade.
Perspectives from a European Investing Expert
Here are the highlights from my conversations with David Marcus, Founder & CIO of Evermore Global Advisors. Since the early 1990s, David has established an extensive network of the most influential families and business leaders throughout Continental Europe and the Nordic Region that affords him a true “on the ground” perspective. So, whenever we need European insights David is our contact. The conversations conducted on: January 30th, April 9th, June 11th, and June 22nd of 2020
Is there any reason to be optimistic about Europe?
We have several recent observations that give us confidence in our European investments in the years ahead. Europe is accelerating. Corporate boards are pushing for change. Recent activism has been more successful than in the past. Mergers and acquisitions are resuming. Conglomerates are breaking up at a faster pace.
What insights have you gained from your network?
Because we have many long-term relationships with these business leaders and have been consistent with them in good times, and in tough times, we find ourselves getting to the top of their “calls-they-will-take” lists. As my team and I have conducted over 100 conversations with CEOs, influential families and large shareholders over the past couple of months, we have gained clarity on how they are thinking today, and, they have provided invaluable perspectives to better inform tomorrow.
Can you explain your thoughts on activism being more successful?
Today, activists in Europe are taking more of a stewardship approach than they ever have before. Historically, activists were largely ineffective in Europe. They have barreled into stocks, punched management in the nose and tried to bully the board into making changes. They have started to realize that the key for success is to behave like a steward and to use the rules, the culture, the whole style of doing business in the local markets more effectively. Now they are using the system to get voted onto boards and then aim to work for change from the inside out over time.
What are your thoughts on private equity’s potential impact on Europe?
I read a report this quarter that said there is now 1 trillion of cash on hand for private equity worldwide. We keep seeing fund after fund raising capital for two areas above all – Europe and Asia. These record levels of capital will need to be deployed over the next few years. With the valuations as compelling as they are in Europe, in our opinion, that will be an extremely ripe region for continued explosion of deal flow.
Has the environment changed for European corporate restructurings?
Many of today’s restructurings are working for investors. The gains from cost cuttings and operational cleanups are getting to the bottom line and to shareholders, instead of being siphoned off by unions or passed on to customers in the form of price reductions in an attempt to gain market share. The unions are generally being more ‘going concern’ focused and understand that they must work with companies and not against them. As more restructurings occur, we feel optimistic that their effectiveness will continue to deliver results.
Why do you feel that mergers and acquisitions have resumed?
This is due to conglomerates breaking up. Selling non-core and/or poorer performing divisions to focus on their best performing assets is creating an improved M&A environment. Additionally, we are hearing that Chinese companies are seeking to buy assets in developed markets that have scalable businesses. And clearly, both Europe and the U.S. are perfect target areas, except that the U.S. has put up substantial roadblocks for China based acquirers. So, for now, the Chinese seem to be focusing more on Europe.
What more can European leadership do to improve conditions?
The European Central Bank (ECB) has already outright confirmed that they will support member states as much as is necessary. It is hard for me to imagine that the ECB will allow a repeat of the Euro financial crisis during the COVID-19 recession.
To me, it feels like there is a good chance that a market recovery will be an investment-driven recovery. If you have ever spent time in Europe, you know that their bridges and roads need improvement. If the EU did one big infrastructure project, I think it would compel many other leaders to come together. And the people would rally around it because it would be a legit opportunity to get people back to work, outside, in non-confined spaces.
Lastly, the idea of an EU Recovery Fund is a potential game changer. This type of fund, rumored in the $500 to $750 billion range, has never happened before. Should this come to reality, and be effectively implemented, it would likely lead to greater coordination amongst the member countries and increased capital flows to the entire region.
This really could be a whole new level of global coordination. You can already see the financial systems are better prepared and experienced at handling economic crisis. And there is surely a new era of data sharing and cooperation underway, on both the medical and economic fronts. This leads me to believe that the economic stimulus that is being provided could serve as a form of jet fuel for the market once the biologic problem is treated and life returns to some altered form of normal.