Europe proves the most popular equity region for the UK’s savers
EUROPE DAY next Wednesday marks the anniversary of the Schuman declaration in 1950. For investors in continental Europe, it is has proved a successful choice and the prospects look exciting.
Investment trusts in Europe showed 134.5 per cent growth over a decade – far better than global emerging markets (87.7 per cent), commodities and natural resources (losing 20.8 per cent) and even hedge funds (105.2 per cent). The top trust was Jupiter European Opportunities, returning 286.4 per cent.
European smaller companies showed even stronger growth, up 225.3 per cent, led by JP Morgan’s fund which rose 248.5 per cent. By comparison, Japanese smaller companies rose 148.1 per cent and North American by 206.2 per cent.
Last month the IMF predicted growth in France to rise 2.1 per cent this year and in Germany by 2.5 per cent with two per cent forecast for both in 2019. According to the Investment Association, Europe is currently the most popular equity region for UK savers.
Economic fundamentals for Europe are the strongest for years which has fed through to corporate earnings. However, political risks, which seemed to dissipate following Macron’s victory at the French elections, have risen owing to a weaker Merkel after the German election, and a swing to the populists in Italy.
Italy and Hungary are reminders that there are going to be very different and competing visions over the direction of the EU once the UK has left despite the apparent united front portrayed in the Brexit negotiations.
The strength of the euro, together with a slowdown in the Chinese economy, is beginning to reduce export growth, which will notably affect Germany. “The ECB will need to keep a careful eye on its policy tightening over the rest of this year,” predicts Martin Payne of wealth manager Brewin Dolphin in Leeds.
Clearly, parts of Europe look worrying. Its emerging markets are still unstable with Baring’s trust (mainly in Russia, Poland and Turkey) returning 17.1 per cent in 10 years. On a single country basis over the same period, JP Morgan’s Russian securities lost 6.3 per cent. Investors wishing to access Russia can buy shares for many companies in London, notably Evraz (steel making and mining) and Polymetal (gold and silver miner).
Tilney, which includes Bestinvest, has been relatively overweight in Europe for some time although Jason Hollands says that valuations are slightly ahead of the longer term average. He tips FP Crux European Special Situations, BlackRock Continental European Income and Jupiter European.
The first is managed by Richard Pease who has a 30year track record in European markets. The fund has 63 holdings with sizeable exposure to medium-sized and smaller firms. It avoids non-dividend payers and has no exposure in Greece, Italy or Spain. Stocks include Aroundtown, which invests in property in Germany and the Netherlands, and Wolters Kluwer, suppliers of data and intelligence to healthcare, tax, finance and legal professionals.
The BlackRock fund is an option for investors looking to diversify their yield beyond the UK. It seeks larger European companies, notably Allianz, Deutsche Post, Novartis, Telefonica and Zurich Insurance and pays 4.1 per cent. Hollands says that Jupiter European has “a high octane, high conviction approach and is run in a style that is unconstrained by sectors or the index”. Key areas are healthcare, media and technology.
Nick Keenan, director of Barclays Wealth, sees an increasingly broad-based and vibrant economic recovery in continental Europe. “This context should be perfect for some of the more cyclical sectors to shine.” He tips industrials and technology, stressing a diversified approach that allows exposure to higher quality stocks in core Europe.
Investment director for personal investing at Fidelity International, Tom Stevenson, says that while Europe is no longer the bargain of early last year, “the region still benefits from solid economic fundamentals and accommodative central bank policy”. He expects earnings growth to hit double digits this year.
Stevenson fears a few headwinds, notably the strength of the euro and ongoing trade tension with the Trump administration. He tips Invesco Perpetual European Equity Income fund for value investors and FP Crux European Special Situations for those preferring a growth bias.
Charles Stanley typically recommends 5-6 per cent in Europe. Jonathan Baker, investment director in Leeds, likes Baillie Gifford European for its strong track record, based on leading global companies with strong management teams and a competitive advantage.
On a price to earnings ratio, European shares are trading well below their long-term average valuations. Baker also tips both the BlackRock and FP Crux funds favoured by Hollands.
Last year Europe saw falling unemployment and 2.3 per cent growth, which Joel Dungate, investment analyst at Redmayne Bentley, notes was “the fastest rate of growth for a decade”.
Whilst there is a currency risk, he says investing in Europe could be advantageous from a diversification perspective. On individual shares, familiar names include Banco Santander, Fiat and Nestle.
On collectives, which are generally cheaper, Dungate favours Jupiter European Opportunities, an investment trust with a very strong track record that has outperformed its peers in both price and net assets over one, three and five years, and has almost one-third invested in Germany.
Payne favours three funds: Henderson EuroTrust, which targets predominantly large and medium-sized firms with an unrestrained benchmark and has returned almost 84 per cent over five years, Artemis European Opportunities and the BlackRock fund.
Quality companies form the core of the Artemis fund and Payne says it is run “with a pragmatic approach” which allows for ideas generated by the prevailing investment environment.
UBS thinks the modest easing in the pace of growth is likely to continue and have recently moved from an overweight position on eurozone stocks versus the UK.
Garry Ibison, chartered financial planner at Chase de Vere in Leeds, notes that while Europe is firmly on the road to recovery, its shares are significantly cheaper than those in the US. European companies have large amounts of cash with many earning over half their revenue outside the eurozone.
JP Morgan Europe Dynamic is Ibison’s choice for a “best ideas fund” with attractively valued, high quality holdings. He also tips Jupiter European and Janus Henderson European Growth. The latter’s manager has a good track record of identifying hidden value with a focus on good quality, mid-cap stocks.
For those who prefer a passive approach, look at Legal & General’s European Index which invests in around 500 firms. Savers with Hargreaves Lansdown have an exceptionally low 0.09 per cent ongoing charge plus an annual platform fee of 0.45 per cent.
Finally, two income fund tips are made by Chelsea Financial Services and Architas respectively: BlackRock Continental European Income, based on undervalued stocks that offer reliable, sustainable dividends, and Schroder European Alpha Income where shares are picked to reflect recovery.