In recent years, consumers have been exposed directly to the benefits of evolving technology through services such as Chat GPT and built-in AI components to technology, giving consumer-facing businesses, including many of the ‘magnificent seven’ constituents, a boost in markets.
However, Marcel Stötzel, co-portfolio manager of the Fidelity European trust, said that while the current cycle has benefitted companies at the top, the next innovation cycle could spill over into areas focused on the business to business (B2B) level, with AI and other technology being put to use on factory floors and throughout other areas of business.
“If you look long term, over the last 10-to-20 years, it’s been a very B2C [business to consumer] innovation cycle. All of the big companies, Apple, Facebook, Google, Tesla, they’re all B2C, but that’s not always the case,” Stötzel said.
“There are times when B2B is much more innovative, and it moves in cycles, because you get to the end of the innovation curve. If you think about it, how much better is each iPhone at this point? Not much better, right? How much better is your social media? How much better is your Netflix? It’s reached the [maximum] level of innovation.
“Whereas, when you go to a production floor, I’m always surprised. It looks the same as a factory would have looked in 80s.”
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Although the current cycle has been relatively limited to the success of US companies, this spread of innovation could move to areas like Europe, as sectors such as pharma and sustainability are benefitted by AI.
“In the next cycle, and we’re talking in 10 years… I’m not saying Europe is going to overtake the US, I’m not saying Europe is going to be the winner in AI and is going to leave the US behind, but Europe is going to share in the gains much more than they did over the last cycle,” Stötzel said.
In the meantime, the US success has created some promising valuation opportunities for companies that are listed in Europe, Stötzel noted.
Such was the case for Zyn, beginning as a Swedish company that sells flavoured nicotine pouches as a cigarette substitute. However, the company gained popularity in the US, becoming the main source of revenue, and was acquired by US company Phillip Morris.
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“Philip Morris looked at it and said: ‘This company is essentially American in terms of most of its revenues, but the share price has fallen’.” Stötzel said.
“It was through Covid, and its share price is in dollars because it is Swedish listed, And the SEK had fallen heavily. That meant you could get $4 of earnings and only need to pay 80 cents.”
Stötzel thinks this same model could work for other companies that are being priced differently simply because they are listed in Europe rather than the US, resulting in attractive valuations.
The European Central Bank’s decision to cut rates in June, while the US Federal Reserve has held strong to its 5.25% to 5.5% range, could also open some opportunity for the market.
“I think that has a potential to be positive for Europe,” Stötzel said.
“If you look at the long-term chart of Europe versus US, it was the greatest trade there ever was. You could have gone short Europe long US anytime during the past 20 years and you would have made money. Interestingly, only a third of MSCI Europe’s revenues come from Europe, which is always a stat that blows my mind. Europe is a global benchmark, but it has still lagged the US massively, despite the fact that a lot of European companies benefit enormously from the US.”
While there is possibility that lower rates in Europe could raise appeal to global investors, Stötzel remarked that ultimately, he is “not smart enough” to know what the spark will be, and instead has stuck firmly to a bottom-up view. The strategy has worked in Stötzel’s favour in the past five years, with the Fidelity European trust boasting a 74.2% share price total return, in comparison to the Europe AIC sector’s average gain of 47.6%, according to the Association of Investment Companies.
“If you look over the last few years, when you had the Russian invasion, Covid, all kinds of super top-down driven markets, we were still able to kind of make sure that bottom-up stock selection was the main driver and perform well.”
