Global equity markets have staged a strong recovery from the shock of President Trump’s initial tariff policy earlier this year. Despite Europe’s strong rally and outperformance of the US during 2025, our analysis shows that Europe’s best cash flow stocks are still inexpensive.
By applying core proprietary cash flow ratios, we identify the top-rated 20% of the European market and pick our investments from this group, which we call Cashflow Champions. We also monitor the aggregate valuation of this cohort, and this analysis shows that despite the rally, these stocks on still around one standard deviation below their long-term (35-year) average.
In addition, levels of corporate over-aggressive cash investment remain low. This is a contrarian indicator, so a low reading contributes to a positive market outlook.
We aim for our portfolios to provide core European market exposure, with the flexibility to perform well in different market environments. This flexibility is driven by our market regime indicators, which guide us on which investment styles and secondary cash flow scores to emphasise given the prevailing market conditions.
While the environment for cash flow investing in 2025 has seen some undulations as investors respond to an unpredictable geopolitical landscape, the application of regime indicators and secondary scores act as supplementary drivers of alpha.
Our investor anxiety indicator has been falling, suggesting a balanced portfolio by style currently, albeit with an emphasis on momentum and a growing role for quality growth.
Dynamic approach
The Cashflow Solution investment process is designed to adapt to changing market conditions, which helps us time our exits and entries to positions. For example, in late 2024 we sold two long-term quality growth stalwarts – ASML and Novo Nordisk – from our European portfolios. However, by applying the same investment process to a dynamic data set – valuation, price and market regime data which changes continuously, and company cash flow which often updates quarterly – our analysis has led us to reinstate ASML within portfolios as a high-conviction European holding.
ASML
While ASML and Novo Nordisk stocks had been good long-term contributors to portfolio performance and both retained enough cash flow appeal to rank in the top 20% of the market across our two core cash flow ratios – our Cashflow Champions Watchlist – some modest deterioration in trends last year meant they were no longer among the best 30 to 50 ideas which we would wish to include in a portfolio.
Dutch lithography specialist ASML has seen booming demand for its technology as the semiconductor industry has ramped up production during the artificial investment boom.
While historically ASML generated a lot of cash from its asset base, enjoyed strong business momentum, self-funded its own growth and returned lots of cash to shareholders, we noticed some gradual deterioration in its cash flow scores, yet its share valuation remained very full.
This year, an improvement in ASML’s cash flow profile prompted us to revisit the position at the start of the fourth quarter. Most notably, ASML’s share valuation had moderated, naturally boosting its appeal on some of the cash flow ratios we look at, and the shares had returned to the top decile of the European market on our core composite cash flow ranking.
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KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Cashflow Solution team:
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May have a concentrated portfolio, i.e. hold a limited number of investments (35 or fewer) or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market.
- The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. International banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.
The risks detailed above are reflective of the full range of Funds managed by the Cashflow Solution team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
