Greece: the eurozone’s dark cloud
Draghi’s QE is helping some troubled members recover
EUROPE is back in the headlines as the possibility of a Greek exit from the eurozone looms – and investors are wondering what it means for them.
Greece’s economy has long been a sticking point for euro-optimists, blighted as it is by debt, unemployment and political unrest.
Martin Harvey, a fund manager at Columbia Threadneedle, says: ‘The risk of Greece exiting the eurozone appears to be increasing day by day as political stalemate continues.
‘There seems to be a general expectation that it would be manageable for the eurozone financial system due to the large number of firewalls in place following years of crisis-fighting, but the symbolic implication of a member leaving must surely lead to increased risk as investors consider the prospect of others following suit.’
Still, it seems unlikely that the country will leave the single currency. Mario Draghi, pictured, president of the European Central Bank (ECB), has previously said he will do whatever it takes to keep the eurozone together.
Europe bulls say things are improving. The ECB decision to begin pumping money into the economy has led to growth over the past two quarters. It’s not much – 0.4 pc in the first three months of this year – but it’s a sign that a recovery may be under way.
And it’s not just Germany propping up the continent. Positive data from France and Italy has started to emerge and both these countries are now officially out of recession after posting growth.
On top of that the fall in the oil price and a weaker euro is helping exporters while reducing the demand for imports, and low inflation is providing a welcome boost to household spending power.
Sam Cosh, fund manager at F&C, thinks smaller companies on the continent are most likely to prosper from the recovery. Manufacturing and services firms are showing improvements already, and exporters will benefit from the weakened euro, which will make them seem more competitive.
Cosh says: ‘As a general rule, small companies benefit the most in the first phase of a recovery.
‘But the outlook is also brightening for big multinational firms which can offer their products at better prices, which ties in well with demand in the US as it continues to do better.’
He invests in a range of companies across the continent including Irish food group Origin Enterprises, French plastic manufacturer Plastic Omnium and British kitchen firm Howdens Joinery.
There’s still a way to go, of course. Unemployment hovers around 11pc, and the problem of the ‘Grexit’ is not likely to go away soon. But Cosh adds: ‘These persistent challenges will certainly fuel volatility, but that volatility can provide opportunities to buy shares and boost returns for investors.’
Darius McDermott, who is a director at the rating agency FundCalibre, says: ‘Monetary stimulus has really supported the stock markets in the UK and US so there’s no reason why it can’t do the same in Europe, which would be good for equity investors.’
He likes the Threadneedle European Select fund, which invests in businesses with good prospects for growth such as L’Oreal, healthcare firm Novartis, and chemical distributor Brenntag. The fund has returned 10pc over the past year. He also likes the Jupiter European fund, which has 20pc of its money in support services firms such as Amadeus IT Group, and 15pc in pharmaceutical and biotechnology companies such as Novo Nordisk.
The fund invests in companies across Europe, but almost a quarter of its money is in German firms such as Bayer. The fund returned 16.8pc over the past year.
McDermott says: ‘Mario Draghi still has a lot of ammunition left for quantitative easing, but a Grexit is a dark cloud hanging over proceedings and we will have to wait and see how it plays out.’ Holly Black is a Money Mail reporter