Cash in on the growth prospects of Europe's companies

The Fidelity European Trust takes a cautious approach to risk and aims to achieve consistent long-term outperformance driven by stock selection. The strategy focuses on identifying companies capable of sustainable dividend growth over a period of between three and five years. We look for four main characteristics in businesses: positive fundamentals; the ability to generate cash; a strong balance sheet; and an attractive valuation.

We also seek balance across sectors, believing that stock selection should be the primary driver of performance. By focusing on quality businesses, the strategy tends to outperform in weaker markets, providing a defensive edge. Additionally, our long-term view aims to improve performance and reduce transaction costs.

Europe’s best airline poised for take-off

We see an attractive opportunity in no-frills airline Ryanair (Dublin: RYA). It is one of the lowest-cost providers in a commoditised industry, with a laser focus on keeping costs down and solid cash generation. Although it is operating in a challenging sector, the company is distinguished by its management team, which is the best in the sector. Moreover, it is attractively valued, owns its aeroplanes, and has the highest route density in Europe.

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With an improved balance sheet and a normalised market environment, we see strong potential for sustainable capital returns. The company can also benefit from higher-than-expected fare increases, given curtailed supply of new aircraft and grounding of competitors’ aeroplanes. The combination of these factors creates a compelling structural story.

TotalEnergies (Paris: TTE) is a multi-energy company that produces and markets fuels, natural gas, and electricity. It is one of the few examples of a business in a cyclical industry that maintains a steady dividend payout despite volatile earnings. The company stands out as a superior long-term capital allocator, supported by a prudent and well-executed management strategy.

The group’s upstream portfolio remains robust, featuring high-quality projects. TotalEnergies also prioritises shareholders’ interests and demonstrates strong forward planning. It has refocused on more renewable energy sources, including solar, wind, biomass, hydrogen and electricity, as well as the traditional natural gas and oil business. TotalEnergies’ long history of dividend growth bolsters our confidence, making it one of our top positions in the trust.

A stock to play AI

What excites us most as we look ahead to 2025 is witnessing the transformative impact of the broader adoption of AI. A standout stock in this field is the French electrical company Legrand (Paris: LR), a key holding in our trust. While many investors focus on well-known US leaders in the field of artificial intelligence, we see Legrand as a more subtle way to capitalise on the AI trend.

The company provides much of the “white space” equipment for datacentres (power distribution units, switches, transformers) and this part of the business is growing strongly. In addition, the rest of Legrand’s business (focused on residential and non-residential construction) is well positioned to benefit as these markets recover from cyclical lows.

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