The conflict in Ukraine means European companies are contending with a steep rise in inflation, higher energy prices and a weakening of both consumer and business confidence. The inflation rate in the Eurozone reached 8.1% in May, which is the highest level since 1983.
In addition, there is uncertainty about what will happen next in the war and to what extent Russian gas exports to Europe will be reduced. So, the economic backdrop for European companies contains a number of challenges.
However, inflation and energy prices are unlikely to stay at these elevated levels indefinitely. If rising costs and reduced confidence result in a slowdown in economic growth, that is likely to put downward pressure on inflation and energy prices.
A slowdown is also likely to persuade policymakers to take a more cautious approach to increasing interest rates and withdrawing quantitative easing. In very broad terms, this should benefit businesses.
In the meantime, the companies we talk to are telling us they are still trading strongly. Industrial businesses are among those most exposed to the rising cost of raw materials such as steel, wood and copper. They tell us though that general awareness about the scale of the global inflation shock has made it easier to pass on rising costs to their customers. Meanwhile, demand for goods and services remains strong because of pent-up demand still lingering from the pandemic.
When we invest, we seek out companies that have first-class management and a proven business model and where the share price does not, in our view, reflect the growth potential of the business. As part of this, we look for long-term growth drivers supporting the company’s expansion. It is important to remember that, despite rising inflation and the war in Ukraine, these growth drivers remain firmly in place.
For example, we invest in a French company called Delta Plus, which is a manufacturer of personal protective equipment for industry, including helmets, masks and safety harnesses. The long-term growth driver is rising demand for the company’s products because of increasing health and safety standards in both the developed world and developing economies. This driver remains as strong as ever.
Another French company we hold, Mersen, makes sophisticated components used in electric motors and in the manufacture of solar panels. Here the growth driver is the rapid expansion of renewable energy production and electric vehicles and, again, this driver remains very robust.
Looking ahead, there is clearly uncertainty. However, this is also creating opportunities. This year’s stock market sell-off means high-quality companies are now on significantly lower share prices than they were 12 months ago. It is interesting to note that takeover activity in Europe, which had been subdued, has begun to increase in recent months. Companies are clearly seeing value with share prices at this level – and we too are taking the opportunity to top up our investments in high-quality companies at significantly lower valuations.
David Walton, 30/06/22
Capital is at risk. The following is a summary only of some key items in the Prospectus and more details can be found in the Prospectuses. Investors in Protected Cell Company (PCC) must have the financial expertise and willingness to accept the risks inherent in this investment.
Past performance is not a reliable indicator of current or future performance; it may not be repeated and should not be the sole factor considered when selecting funds.
It should be appreciated that the value of Shares is not guaranteed and may go down as well as up and that investors may not receive, on redemption of their Shares, the amount that they originally invested.
Investment in the Company should only be undertaken as part of a diversified investment portfolio. Investment in the Shares should be viewed as a medium to long term investment.
Shares may not be redeemed other than on any Dealing Day.
There will not be any secondary market in the shares of the Company.
The individual cells of the fund act as feeder funds to various UK-authorised collective investment schemes, which may be exposed to stock markets and market conditions can change rapidly. Prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The fund invests in smaller companies which are typically riskier than larger, more established companies. Difficulty in trading may arise, resulting in a negative impact on your investment. The fund invests in other currencies. Changes in exchange rates will therefore affect the value of your investment. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or In a timely manner.
The Cells referred to are a cell of Marlborough International Fund PCC Limited (the ‘Company’), a protected cell company incorporated in Guernsey and authorised as a Class B Collective Investment Scheme under the terms of the Protection of Investors (Bailiwick of Guernsey) law, 1987, as amended. Investment may only be made on the basis of the current Prospectus, this can be found on the website www.marlboroughinternational.gg.
Marlborough International Management Limited is incorporated in Guernsey.
Registration No. 27895. Regulated by the Guernsey Financial Services Commission. It is not protected by any investor compensation scheme.