Fidelity European (FEV ) fund manager Marcel Stötzel believes today’s global market selloff is an opportunity to buy companies that had become too expensive, including those in the AI sector that helped drive equity indices to worrying all-time highs.

Stötzel, a Citywire AA-rated co-manager with Sam Morse on the £1.6bn investment trust, said the correction triggered by fears of the US entering a recession provided a chance to look at ‘fallen angels’, or high quality stocks with strong balance sheets that would be eligible for the portfolio of dividend growers.

This includes French data centre company Schneider Electric (SU.EPA), for example, as AI spending is unlikely to be restrained following the market retreat. Shares in the Paris-listed stock have fallen 1.2% today, less than the 2% slide in French and European stock markets, but have declined 12% in the past month. They have a Citywire AA-rating reflecting the backing they have from ‘Elite’ global fund managers.

Stötzel said he and Morse had been concerned in recent months as the Magnificent Seven US technology stocks drove markets upwards and investors believed the Federal Reserve would achieve a ‘soft landing’ in the economy.

However, cracks were already starting to show in the consumer space as the luxury sector came under pressure at the beginning of the year, followed by travel, with hotels and airlines struggling, he said.

‘It made us nervous. Everyone was primed for an immaculate landing two weeks ago, which may still happen. But we felt the risk-reward setup wasn’t great. Things were primed and priced for perfection, which made us quite nervous. Over the last week or two, there were cracks in the narrative following the economic data or view that the Federal Reserve is behind the curve in terms of cutting,’ Stötzel (below) said.

He and Morse won’t make any hasty changes, however, given their defensive stance and the fact the selloff had largely knocked ‘momentum’ stocks, although ASML (AMS.NL), the Dutch company that is the dominant supplier of the machines that make AI chips, has fallen 28% over the last month. The stock, which has risen 281% over five years, is the trust’s second position at 7.5% of assets at 30 June.

The pair haven’t ‘battened down the hatches’ either, choosing to maintain gearing, or borrowing, at around 10%, where it has stayed since the Covid pandemic.

‘In our long-term history, it’s during moments of high stress like these that we tend to make more money, as we did during Covid and after Russia’s invasion of Ukraine,’ Stötzel said.

Morningstar data shows the trust’s total underlying returns fell 4.3% in 2022, the year Russia invaded, while the FTSE World Europe ex UK benchmark index lost 13%. The shares slipped 2% today and ended last week on a narrow 3% discount to asset value.

Earnings recover

Half-year results today showed that over the six months to the end of June, the trust’s total returns of 7.6% pipped the benchmark’s 7.1%, while shareholder returns jumped 10.6%, driven by continued strong performance from weight loss drug maker Novo Nordisk, ASML and private equity investment trust 3i Group (III ), which holds a huge stake in Dutch retailer Action.

The board increased the interim dividend by 10.4% to 3.6p per share, covered by revenues of 8.38p per share, up from 7.38p in 2023. This reflected several companies resuming dividend payments, including airline Ryanair.

The largest holding at 8% of assets, Novo Nordisk, could see some competition over its weight loss drugs following reports that Swiss peer Roche (RO.SWX), a 4% position, has had successful early-stage trials for its own drugs.

Stötzel, who is also Citywire A-rated for the trust’s open-ended sister fund of the same name, said that Roche was in the portfolio mostly for its recovering pipeline, but added that it remained very early days with a possible drug coming out in 2030 at the very earliest.

Novo has protections against any competition, with production and supply locked down, while it has built up a strong brand name with Eli Lilly. The company is spending all profits from its Wegovy drug on innovation to make sure it can continuous to roll forward, he said.

‘It pulled two rabbits out of a hat, obesity and diabetes, and it can do it again,’ Stötzel said, adding that he would continue to monitor its competition.

Over five years, shareholder returns of 75% put the trust at the top of the Association of Investment Companies’ six-strong European trust sector.