Europe Day has just been held. It records Robert Schuman’s declaration on May 9, 1950 that peace and unity would be created by establishing a European institution which would pool and manage coal and steel production.
Certainly those investors who have placed their money in Continental Europe in recent years have enjoyed good returns. Over the last decade, a top performing investment trust like Jupiter European Opportunities has grown by over 660 per cent.
Europe is an important part of the global economy. “European shares should have a place in virtually every investment portfolio,” says Kelly Kirby, chartered financial planner at adviser Chase de Vere in Leeds.
Many good quality companies with consistent profits and strong cash-generative balance sheets are based in Europe, notably Nestle, Novartis and Roche. Frequently such firms earn half their revenue from outside the eurozone and so are trading globally. Belgium-based AB InBev, for instance, is the world’s largest brewer, operating in 50 countries and earning 57 per cent of its revenues in emerging markets.
With many of these European companies world leaders in their sectors, “active managers can really add value as there are always opportunities to be found”, says Darius McDermott of Chelsea Financial Services, citing particularly smaller European firms for their top performance over the last 15 years.
One immediate attraction in opting for continental Europe over the US is that its shares are on a significant discount. Traditionally, this has been 15 per cent but has widened to 40 per cent which presents a great opportunity.
In the short term, the economic outlook looks dull. The International Monetary Fund recently downgraded growth in the eurozone to just 1.3 per cent for 2019. Several economies, notably Italy and Germany, are flirting with recession. A slowdown in trade will affect manufacturing which has reported its steepest fall in six years, led notably by motor vehicles.
The prolonged Brexit saga places a question mark over political stability. Civil unrest in France and the rise of extreme parties in Italy and Spain do not augur well. A trade war with the US may be looming as President Trump turns his attention from China to Europe.
In trading terms, after the US, Europe is the UK’s main export destination with Germany, followed by France, the Netherlands and Ireland. Another concern is China’s slowing growth which poses a risk to European earnings.
To help counter a slowdown, the European Central Bank has delayed an interest rate rise until at least the end of this year and given banks fresh access to very cheap funding. Its president, Mario Draghi, has been highly successful but is due to be replaced in November. His “whatever it takes” undertaking brought the eurozone back from the brink soon after the start of his eight-year term.
With valuations below their long-term average, now could be a good time to enter or add to European holdings particularly if some volatility around the elections later this month can be accepted.
JP Morgan Europe Dynamic is a fund favoured by Adrian Lowcock, head of personal investing at adviser Willis Owen. The collective uses a data analytical process which is complemented by both research and individual company evaluation.
Lowcock also favours FP Crux European Special Situations where manager Richard Pease is not afraid to avoid heavyweights if an investment case is lacking. The fund is largely unconstrained and differs notably from the competition and yet shows loess volatility.
Martin Payne, senior investment manager at Brewin Dolphin in Leeds, says the firm has generally been underweight in Europe but is now more neutral on the region as the slowdown “may have bottomed”.
He likes Henderson Eurotrust, managed since 1994 by Tim Stevenson who seeks up to 50 high quality, reliable companies with attractive long-term growth characteristics. Payne also tips Artemis European Opportunities, part of whose holdings is opportunistically allocated to ideas generated by the current investment environment.
Seeking a generalist European fund is “unlikely to prove profitable in the current climate as it will likely capture the lacklustre performance of those European countries which are having a torrid time,” warns Carolyn Black, associate director at Myddleton Croft. Black says investing directly in one or two equities is “a high-risk strategy.”
Black recommends instead opting for funds which focus on pockets of value and economies which are displaying strength within Europe, citing the “more progressive countries of Spain and Portugal”.
William Smythe-Osbourne, investment manager at private client broker J.M. Finn, says: “Europe remains a fragmented market which opens the door for truly active managers, picking stocks on fundamentals and agnostic of benchmark composition.”
If looking for growth, he tips Jupiter European Opportunities, a very concentrated fund of growth stocks in structurally growing sectors and deliberately global revenues. The manager adopts a buy-and-hold strategy.
Given the economic headwinds facing Europe, Chase de Vere feels there are better valuations and opportunities in the UK but in Europe its favoured funds are BlackRock European Dynamic with a concentrated portfolio of high growth, under-researched companies, and Liontrust Sustainable Future European Growth, which has a consistent track record aimed at stocks which improve people’s quality of life from education and medicine to technology.
Kirby also favours the HSBC European Index to provide broad exposure. It tracks the performance of the FTSE Developed Europe (excluding UK) Index. It is low cost with an annual charge of 0.07 per cent.
For a pan-European fund with around 30 per cent in the UK, McDermott likes T. Rowe Price’s European Smaller Companies. He says the manager is highly experienced with a good track record of investing in small and medium-sized firms.
If seeking exposure to larger companies, his recommendation is Waverton European Capital Growth. For a bias towards the larger company which is restructuring, his third tip is BlackRock European Dynamic. If the accent is growth, Man GLG Continental European Growth is favoured by The Share Centre. The fund looks for both established winners that have a clear three to five-year expansion path in terms of earnings and free cash flow.
Funds that focus on high quality businesses with resilient earnings and are not overly exposed to domestic Europe or the banks are favoured by Jason Hollands of Tilney Investment Management. He cites three: BlackRock European Dynamic, FP Crux European Special Situations and Jupiter European Opportunities.
If the priority is income, Payne likes Black Rock Continental European which currently yields 4.2 per cent. Managed by Andreas Zoellinger since launch in 2011, it aims to achieve above average income without sacrificing long-term capital growth. Smith-Osbourne’s income choice is Polar Capital Europe (excluding UK) Income which avoids mining and motor stocks to obtain above-average yield combined with long-term growth potential.
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