European sovereignty: from megatrend to investment opportunity

May 13, 2024

By our editorial team

How do you view European sovereignty?

Friedberger: ‘Sovereignty is usually defined as the exercise of power over a geographic area and the population living there, or as the status of a state that is not governed by any other. In theory, sovereignty usually pertains to individual states, whereas Europe is made up of states that have been in confrontation with each other for centuries – militarily, culturally, and economically – all to defend their own sovereignty. In this context, we define ‘sovereignty 2.0’ as the ability to trade with your partners while implementing your own principles on your own soil and in your relationships with other nations without having to adjust your values. This implies a certain degree of autonomy and economic resilience as well as cultural, scientific and academic influence.’

How is Europe positioned in the global race to sovereignty?

Friedberger: ‘The United States has achieved energy independence and enjoys technological, military, and monetary dominance, while China benefits from the size of its domestic market and its dominance in artificial intelligence and in multiple supply chains, including strategic metals refining. Europe appears by comparison to be the poor sibling of the three leading economic blocs. Moreover, with rising tensions between the United States and China, the COVID-19 crisis and the Russia-Ukraine conflict, the trend towards deglobalization is accelerating. Against this backdrop, there is a clear necessity to build resilience by strengthening ecosystems at the local level. This is where the size of the domestic market becomes particularly important and where Europe has a clear advantage as the European Union represents a market of almost 450 million people¹, one-third larger than the United States.’

What does this mean for investors?

Friedberger: ‘The turning point that we have now reached in globalization opens up a unique investment opportunity on the European continent. In a world where ‘local’ is synonymous with resilience, and ‘global’ with fragility, Europe has considerable potential for investors wishing to support entrepreneurial success stories to expand their businesses throughout the continent’s domestic market.’

Majstorovic: ‘To make things more concrete, the European Commission has launched many initiatives, such as the EU Chips Act, which aims to increase the European semiconductor production capacity from 10% to 20% of the world market by 2030, the RePowerEU program, which plans to invest circa € 300 billion in energy transition, and the InvestEU Fund, which has a much broader scope and aims to invest over € 370 billion in various strategic areas targeted by the European Union (sustainable infrastructure, digital transition, and innovation).¹

We believe that supporting these initiatives will generate value for long-term investors. In fact, our belief is that in a more deglobalized and less capital-optimized world, several megatrends will emerge and will concentrate the bulk of growth – and European sovereignty is one of them.’

In what areas do you see the most attractive opportunities?

Friedberger: ‘Europe can position itself as a world leader in sectors such as impact investing and acquisition financing with private debt, as well as private equity financing, to create European industry leaders and help realise Europe’s energy transition. The latter for example constitutes a clear vehicle for growth in a Sovereign Europe.

Why? Because the need to relocate production in a less globalized world demands considerable investment and entails higher salary costs. Improving energy efficiency in buildings, vehicle fleets, industrial processes and supply chains will allow European companies that relocate and build resilience to remain competitive. Moreover, in order to attain the objectives set out in the Paris Agreement, $ 4 to $ 6 trillion must be invested in the energy transition each year from now until 2030 and 80% of this amount must be invested in transforming existing infrastructure.² This will guarantee steady growth for companies capable of providing solutions to transform the existing system. These days, many of those that contribute to solutions are located in Europe.

In order for European sovereignty to be a success, the other condition is that its economic system must be made more resilient. Several factors should contribute to this resilience. Cybersecurity could be one example. From a European perspective, the expected inclusion of cybersecurity in the European social taxonomy is proof that this sector is central to the construction of more resilient ecosystems. All economic actors are going to have to invest heavily in this area if they are to build resilience. Just like the transition to renewable energy, this sector represents a unique investment opportunity.’

Majstorovic: ‘On capital markets, we have identified seven themes that are pivotal when investing in European Sovereignty. Among those, we can cite:

• Industrial autonomy: strengthening local value chains, fostering sustainable industry trajectories through investment in research and innovation.
• Digital competitiveness: addressing the EU's imperative to bolster digital prowess, particularly in areas such as semiconductors, cloud computing and artificial intelligence.
• Healthcare autonomy: seeking to diminish reliance on imported medicines and promoting medical innovation to strengthen healthcare autonomy, which is crucial as Europe contends with market share erosion vis-à-vis the United States and China.
• Defence: Europe’s defence budgets, which currently stand at 1.3% of GDP³, remain relatively modest. However, the evolving geopolitical landscape calls for a sustained increase in military spending by European countries, particularly in Germany and France.
• Energy transition: pioneering efforts to achieve carbon neutrality by 2050 and foster environmentally responsible growth requires substantial investments in renewable energy, among other things.

Selectivity and a strong investment discipline will remain absolutely essential to seize opportunities within this megatrend.’                                                

 

Summary

• The pandemic and geopolitical tensions have stressed the necessity to build autonomy and resilience in Europe.
• Investing in European sovereignty represents a unique opportunity to become actively involved in the momentum generated by recent European initiatives to remedy strategic dependencies (such as the Green Deal, the Chips Act and the Critical Medicines Act).
• Several themes are pivotal when investing in European Sovereignty and should generate considerable financial value for long-terms investors.