When thinking about investing in Europe, it is impossible not to take into account the various crises it has endured in the years following the global financial collapse. Greek bailouts, fears of the collapse of the euro, more Greek bailouts, political stand-offs and all the various actions taken by the European Central Bank (ECB) have left investors cautious about investing in the region.
The problem is that among all this political and economic uncertainty, during the past couple of years corporate Europe has been ticking over nicely.
In terms of developed markets, Europe outperformed both the US and the UK in 2015, beaten only by Japan, and fund buyers have subsequently been building their weightings to the region. Despite a weak start to the year, many are continuing to see favourable prospects going forward.
Apollo Multi Asset Management’s fund manager Ryan Hughes says it is always dangerous to write off whole regions on the basis of politics and economics, rather than looking at corporate prospects, because in such a large area there are many companies that can, and do, win out.
“There has been an opportunity to make quite a lot of money in Europe, and in 2015 it was a key market for us,” he says. “We have favoured it for the past 18 months, which did well for us in past year, but it has been painful at the start of 2016.
“However, we are favouring Europe on the basis of economic reform, the tailwinds of quantitative easing and a weakening euro, which is helping the exporters. There are a lot of global champions based in Europe, all of which have the ability to prosper regardless of issues with the euro or political change,” says Hughes.
John Husselbee, head of multi-asset at Liontrust Asset Management, comments that the ECB did make mistakes early on post the financial crisis, namely in terms of raising interest rates when it should have been reducing them.
However, he says that since the summer of 2012, there has been a concerted effort to get Europe up and running again. “It is right to favour the economies where monetary and fiscal easing is taking place,” he says. “This has been the story both in Europe and Japan in the past 18 months to two years.”
Competitive edge
Indeed, Husselbee says when it comes to Europe, it is important to consider what happened before quantitative easing and efforts taken to weaken the euro. He believes this has made Europe more competitive on the global market and seen a huge transfer of buying power from the US.
Another tick in the box, adds Hughes, is the fact that corporate earnings in Europe are significantly below those in the US. If this gap were to close somewhat, he says it could produce a huge tailwind for European equities going forward.
So what strategy should investors be following when it comes to Europe, and where is the value?
Dean Tenerelli, manager of the T Rowe Price Continental European Equity fund, says the diversity and breadth of the European investment landscape, and its inter-relationship with the broader global economy, means there is typically no shortage of geopolitical headlines to distract investors.
“Our investors are best served by our focus on finding high-quality companies at attractive valuations,” Tenerelli says. “We have to be mindful of a range of possible scenarios, but these considerations do not drive our investment process.”
Hughes says that with such a vast region, and a large number of companies to choose from in different countries in different economies, the key to winning in Europe boils down to stock selection.
“It has been this way for the past 10 to 20 years and will continue to be this way because it is such a diverse area,” he says. “This points us towards stockpicking fund managers who are prepared to be very different to the index.”
Earnings gap
The fund Hughes has favoured for this reason over the past two and a half years is Argonaut European Alpha, run by Barry Norris. He says: “With the earnings gap between Europe and the US falling, Norris looks to find companies that can surprise the market on an earnings basis, and he has proven time and again he can capitalise on this.”
Husselbee, who himself increased his allocation to Europe this time last year, adopts a core/satellite approach to investing in the continent. In addition to holding a Fidelity index tracker, he favours both a growth manager in the guise of Jupiter’s Alex Darwell, who runs the Jupiter European fund, and for his value exposure he is invested in the JO Hambro Continental Europe fund, managed by Paul Wild.
“We want fund managers who are doing different things at different times, so we look for those who have clear style biases that remain consistent over time; both these manager do this,” he says.
