Forget Brexit talks, Europe has huge potential for the investor
CONTINENTAL EUROPE carries enormous appeal for the investor, notwithstanding the negotiations the UK is making to exit the European Union.
Diversity in a portfolio is vital and too much reliance should not be placed on the UK, particularly when it is the worst performing nation in the EU and indeed in the G7 group of countries for the first quarter of this year.
The UK economy grew just 0.2 per cent, the slowest quarterly pace since late 2014. This meant the UK had the most sluggish economy of the 28 countries in the EU with Germany on 0.6 per cent, Romania on 1.7 per cent and Latvia on 1.6 per cent.
European shares have performed well in recent years and the region continues to look good value by comparison with the US. Corporate earnings are still in the early stages of their recovery which means Europe could potentially deliver attractive returns, notably in the consumer discretionary and industrial sectors.
Key brands like AXA, ING and Santander in financial, Nestle and Volkswagen in consumer goods and Bayer, Novartis and Roche in healthcare cannot be ignored.
It is five years since Mario Draghi, President of the European Central Bank, said he would do “whatever it takes”. The time in between has not been easy and European markets have been overshadowed by other developed nations. In the first two years, they did well on the back of quantitative easing but then trailed sideways, picking up as Brexit approached. European funds are up 31 per cent in the past year.
The challenging political landscape earlier in the year which led to caution among many investors has turned to optimism following Emmanuel Macron’s resounding victories in both the Presidential and Parliamentary elections. However, if Italian elections are confirmed for later this year, there may be some stock exchange turbulence.
Jonathan Baker, investment director of broker Charles Stanley in Leeds, says: “We really like Europe and are comfortable being invested there. The fears of a meltdown have been overplayed.” They recommend holding 13-15 per cent in Europe. Baker recently discussed with a European fund manager who found most Europeans not concerned with Brexit and its impact.
For direct shares, Charles Stanley likes Nov-Nordisk, the Danish pharmaceutical company, as its main products are diabetes care medication which, with related obesity, is an increasing health issue.
Henderson EuroTrust is one of three funds recommended by Martin Payne, chartered wealth manager and director at Brewin Dolphin in Leeds. He says manager Tom Stevenson “looks for high quality, reliable companies with attractive longterm growth characteristics”.
It is generally quite concentrated with 40-50 stocks. Payne also favours Artemis European Opportunities for quality firms which offer high returns or hold a sustainable competitive advantage as well as more cyclical shares.
Since its 2011 launch, BlackRock Continental European Income has found several enthusiasts. The fund aims to achieve above average income without sacrificing long-term capital growth. Payne says the managers focus on strong companies with good free cash flow yields, solid balance sheets and excellent management teams.
Darius McDermott, of discount broker Chelsea Financial Services, is “more positive on Europe than I have been for some time.” He says that by comparison with the high equity prices in the UK and US, there is “some value” to be found in Europe. He tips three funds: Henderson European Selected Opportunities, T. Rowe Price European Smaller Companies Equity and Threadneedle European select.
The investment trust stars over 10 years, according to Morningstar research for
are: Jupiter European Opportunities up 242.9 per cent
Henderson European Focus up 183.4 per cent
Henderson EuroTrust up 180 per cent
JP Morgan European Income up 124.8 per cent.
Smaller firms are often praised for their more agile performance. The best funds specialising in this sector over a decade were JP Morgan European Smaller Companies (up 153.5 per cent), TR European Growth (up 144.4 per cent) and European Assets (up 128.7 per cent).
Kelly Kirby, chartered financial planner at advisers Chase de Vere, notes that many European firms have large amounts of cash on their balance sheets. Generally, such companies earn around half their revenue from outside the eurozone.
She tips BlackRock Continental European Income, JP Morgan Europe Dynamic as “a best ideas fund from a wellresourced investment team” and Jupiter European, which enjoys an outstanding long-term track record. The latter has 3540 holdings in “world-beating companies”.
Until recently Europe has been a rather overlooked region, says Jason Hollands of Tilney. “Shunned by international investors in part owing to concerns about the tide of anti-establishment ‘populist’ parties, concerns about the weakness of European banks and weak growth.” The adviser to Saga clients says European shares had been trading at quite a substantial discount to US markets.
Goldman Sachs estimates that for every one per cent of sales growth, European companies on average grow their net profits by 2.8 per cent which makes them attractively geared into recovery.
Hollands tips four funds: Henderson European Focus with mostly larger firms, Baring Europe Select (targeting 110 smaller firms with domestic focus notably in France, Italy and Germany), Jupiter European (mid to large firms, notably in healthcare) and Standard Life European Equity Income.
“Investing in Europe means gaining exposure to truly international businesses, some of which are exposed to faster growing regions of the world,” says Laith Khalaf, senior analyst at broker Hargreaves Lansdown. He says there are plenty of quality managers to choose from and tips both Crux European Special Situations for its excellent stock selection and Threadneedle European Select, which has a bias towards larger companies and those focusing on growth rather than just paying dividends.
If a tracker appeals, Khalaf ’s low cost option is the Legal & General European Index. It physically aims to replicate the FTSE World Europe ex UK Index.
Redmayne-Bentley’s investment analyst, Emmanuel Afoakwah, says Europe provides more affordable valuations than Japan or the US. He likes two Schroder funds: European and International Selection Emerging Europe.
The former holds firms aiming for sustainability which are growing profitably and improving long term, such as BNP Paribas, whilst the latter seeks capital growth in central and eastern Europe, like oil and gas giant MOL from Hungary.
Invesco Perpetual European Equity is also favoured by Afoakwah with noticeable exposure to financial firms like ING from The Netherlands.
The highly regarded Seven Investment Management is overweight in Europe compared to its strategic asset allocation and remains its favoured region. Its favoured fund is Old Mutual European Smaller Companies.
Architas’s investment director, Adrian Lowcock, likes the flexible approach of BlackRock European Dynamic which can change style from growth and value depending on the economic cycle.