Where can you find innovation in Europe?

Late last year, the European Union agreed a €1.8 trillion stimulus package to help Europe’s economies recover from Covid-19. The funding comes from the long-term budget and the Next Generation EU initiative, whose aim is to create a greener, more digital and more resilient Europe.

These goals will not be achieved without innovation. We think the programme could help shine a spotlight on just how many truly transformative companies there are in Europe. They are creating products and services that can help solve the challenges facing the world today.

We hope 2021 will be the year when outdated perceptions of investing in Europe start to change. There’s a popular narrative that Europe is simply a play on global growth and that there’s nothing particularly new or innovative happening. That isn’t the case.

Seven of the top ten most innovative countries in the world are in Europe, according to the World Intellectual Property Organization’s 2020 Global Innovation Index. The top two are Switzerland and Sweden, while the US comes in third.

What is real innovation?

In recent years, innovation has often been associated with some of the large US technology companies. These companies have transformed how we communicate, shop, consume news and entertainment, and have seen enormous share price gains.

People often ask where the European equivalents of those US tech companies are. But we would argue that Europe’s lack of those kind of tech giants doesn’t mean there’s a lack of innovation. Instead, we think innovation can be much more than those consumer-focused technologies which keep us glued to our screens and are, in many respects, about new ways of delivering advertising.  

For us, science and engineering are the core elements of innovation. We’re looking to invest in businesses that create new or improved products and services that increase productivity and utility for their customers.

In our view, companies that can create such products should achieve higher rates of growth and have pricing power - the ability to raise prices without reducing demand. They would be leaders in their market and able to enter new markets. The high quality of their products or services will mean significant barriers to entry for potential competitors.

There are never guarantees when it comes to investing in shares but we think companies with these attributes should, over time, be able to grow profitably and generate significant cash.

Innovation to solve the world’s challenges

There’s a growing emphasis within the fund management industry and beyond on the UN’s Sustainable Development Goals (SDGs). These are the big challenges facing the world today, from climate change to food security to healthcare access, and many more. (Find out more about the SDGs here)

There are five sectors in particular where we have identified innovative companies whose products can have a positive impact in addressing one or more of the SDGs. These five sectors are: materials science; medical technology & healthcare; processing & data; engineering; and transport.

Materials science

This category covers a broad range of companies operating in diverse fields from nutrition to forestry to all manner of chemicals. Materials Science companies can have a relevant impact on a number of the SDGs. For example, companies with nutrition or crop protection products may be able to target the Zero Hunger goal.

Moving away from oil-based products will be an important part of achieving a more environmentally-friendly future and there are companies in Europe who offer innovative alternatives. As an example, Norwegian bio-refiner Borregaard operates an advanced refinery that uses wood as a raw material to produce products used in construction, textiles and flavourings. Such wood-based products represent a greener solution than comparable products based on oil.

Medical technology & healthcare

The healthcare sector is one where rapid advances are being made. The focus for the past twelve months has been finding a Covid-19 vaccine and innovation has been crucial to that process. Now that the vaccines have been approved, they need to be manufactured at scale. Europe is home to companies who have advanced manufacturing capabilities. Indeed, Swiss company Lonza Group is manufacturing Moderna’s vaccine.

Data & processing

Access to and understanding of data is crucial in an increasingly complex world. Europe has leading data providers who are publishers of scientific or technical information, as well as providing data analytics.

The other side of the coin is processing power, and Europe is home to some key players in the microchip industry that facilitate that. Microchips are also used in non-data areas that are of growing importance. These so-called power semiconductors regulate the flow and control of electric currents.

The power semiconductor content of an electric vehicle is five times that of an internal combustion engine car. Electric vehicle makers like Tesla get all the headlines but under the bonnet the specialised semiconductors, many of which are made by European companies like Infineon Technologies, are crucial. Electric vehicles are an important part of the move to a more sustainable transport infrastructure.

Transport

Public transport is another element of sustainable transport infrastructure. Its use has fallen due to the pandemic but when we do travel again we think people will be more aware of the need to take less environmentally-damaging modes of transport where possible.

Transport apps, planners and booking platforms have a role to play here, especially in making it easier to book longer, complex journeys that might otherwise have been done by plane. Trainline, the number one platform for digital sales in the UK, is a key innovator here – its booking app gaining in popularity over recent years to give it unparalleled scale and dominance.

Meanwhile, safety is an area where there is always room for improvement when it comes to transport. Modern braking systems are increasingly electronic, enabling faster braking and greater vehicle stability. We would highlight German firm Knorr-Bremse as a company making complex braking systems for trucks and trains that can improve safety.

Engineering

Engineering has an important role to play in creating more sustainable infrastructure. Examples include power cables connecting renewable energy sources to the grid, or warehouse automation systems leading to more efficient logistics. Hexagon AB, a specialist in precision measuring technologies, is increasingly using its sensors and software to capture real-world scenarios and convert them into 3D virtual environments, allowing better visualisation of construction sites or infrastructure.

Europe a leader on sustainable issues

The examples given above will probably never be global household names like the US tech giants, but they give a flavour of the innovation taking place in Europe right now. There are many other businesses who have similarly advanced technology and who are leaders in their fields. We see plenty of investment opportunities across Europe in these kinds of businesses. Importantly, many such businesses continue to invest in research & development to maintain their edge over competitors.

Europe is already ahead of the game on sustainable issues at both government and business level; the investment proposed in Next Generation EU offers a further tailwind. We think this focus on environmental and digital issues should help shine a light on the currently under-the-radar innovation taking place in Europe, and the businesses that can help build a more sustainable future.  

Any company references are for illustrative purposes only and are not a recommendation to buy and/or sell, or an opinion as to the value of that company’s shares. The article is not intended to provide, and should not be relied on, for investment advice or research.