DNCA Invest SRI Europe Growth

“Higher for longer”: Rising interest rates have been the defining theme of this start to the economic year, during which concerns about inflation and fiscal policy have fueled investor jitters. On the one hand, rising energy prices (oil up 35%–40% from July lows), combined with resilient economic activity, led several major central banks to adopt a more restrictive monetary policy to contain this resurgence of inflation (the Fed, ECB, BoJ, and RBA all raised key interest rates by 25 basis points). Furthermore, political and fiscal risks have put additional pressure on government bonds, particularly in Europe, in countries implementing costly public policies. As a result, long-term sovereign yields in several countries have reached levels not seen in over fifteen years: the 10-year U.S. Treasury yield stood at 5.28% (+53 basis points over the month), the 10-year French OAT at 4.86% (+68 basis points), and the 10-year German Bund at 3.59% (+27 basis points).

Surprisingly, the equity markets showed great resilience (MSCI World: -1.1%, S&P: -0.3%, Stoxx Europe 600: -2.4%). Strong first-half earnings, combined with expected earnings growth for 2026 and 2027 (+20% and +9% in Europe), have so far helped absorb this rate shock.

September also marked a turning point for the AI theme with the launch of Muse and Dots, the new personal agents from Meta and OpenAI, which illustrate the gradual shift from conversational assistants to agents capable of performing tasks, thereby becoming a new interface with consumers. After several weeks of underperformance, companies exposed to this theme staged a notable rebound, despite a theoretically unfavorable interest rate environment and numerous cybersecurity incidents that punctuated the month of September.

The main positive contributor to performance this month was ASML (+10%). Beyond the resurgence of the underlying theme, its largest customer, TSMC, has (finally!) approved its new generation of “High-NA EUV” lithography systems, following a long period of debate over its cost.

Legrand’s Capital Market Day (+3% for the month, +6% post-CMD) provided an opportunity to raise its 2030 targets: annual organic growth now projected between +6% and +8% (up from +3–5% previously) and an operating margin between 21% and 22% (up from >20%). Electrification and the data center boom remain, more than ever, a key driver, but this event also reassured the market about the group’s ability to address the needs associated with the new direct-current (800V DC) power distribution architecture.

Carel reported remarkable Q3 results (LFL = 26%, EBIT +61%). While the strong momentum in data centers partly explains this performance, the Italian company has also convinced several major U.S. supermarket chains to adopt its solution to comply with new regulations on HFCs (hydrofluorocarbons).

Bureau Veritas, a leader in inspection and certification, also held an investor day, during which it emphasized the evolution of its business mix: divesting more cyclical/mature divisions and acquiring businesses in promising sectors, such as data centers and cybersecurity. This strategy should logically lead to accelerated growth and higher margins.

Iberdrola (+3%) benefited from its continued investments in networks, exemplified in particular by the acquisition of Caruna in Finland, just days before Google announced a $15 billion investment in the country’s digital infrastructure. Expectations surrounding the upcoming strategic plan, as well as the anticipated upward revision of its 2026 targets, have also bolstered investor interest.

The Swiss group, Sandoz, is the global leader in generic drugs, particularly in biosimilars. This segment is set to benefit from a wave of patent expirations (approximately 115 molecules) beginning in 2028 for biologic therapies and in 2031/2032 for GLP-1 agonists. Similarly, the market penetration of these products is much lower in the U.S., offering promising growth prospects. These developments should be accompanied by improved margins, as barriers to entry (regulatory, industrial, and commercial) are much higher in the biosimilars sector. During its Investor Day held in September, the company committed to “mid- to high-single-digit” organic growth and a margin slight increase by 2030, followed by a sharp acceleration over the 2030–2035 period. Visibility is much better than in the traditional pharmaceutical industry, as the uncertainty associated with clinical trials, by definition, does not apply to generic drug manufacturers.

Lottomatica has announced the acquisition of Cirsa, the leader in land-based gaming in Spain and, to a lesser extent, in Latin America. The target is also active in online gaming, but its market share is modest (6%). This is precisely the goal of this transaction: to replicate the success of Lottomatica’s Italian omnichannel strategy in Spain. The regulatory and tax environment appears generally favorable to the industry, although it is more complex due to regional variations. On paper, the transaction is financially attractive, as it is highly accretive, the multiples are reasonable (6x EBITDA), and the prospects for shareholder returns (dividends + share buybacks) are very substantial. However, the operational challenges involved in execution should not be underestimated.

Finally, the mid-cap company Exosens has raised its annual targets (revenue and EBITDA) by approximately 10%, thanks to the faster-than-expected ramp-up of additional production capacity in Europe for intensifier tubes. The Drone and Nuclear divisions are also performing very strongly.