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BLOG: Don’t let a bit of uncertainty put you off Europe

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Written by: Darius McDermott
14/07/2016
I'm no political commentator and the conversation on whether Brexit may herald the beginning of the end for the European Union has about all the opinions it can handle, I reckon. What I can say, from an investor's perspective, is that the reasons to hold European equities have not materially changed following the UK's vote.
BLOG: Don’t let a bit of uncertainty put you off Europe

Yes, there may be heightened uncertainty, but let’s not forget this can bring buying opportunities for the long-term investor. And yes, there are some areas of concern among eurozone corporates and economies, but most of these were present long before the idea of a referendum was raised on our side of the channel.

Because of general break-up nervousness, investors have been trying to ‘price this in’ to European stocks – meaning, essentially, these stocks have been falling in value. Yet this is not the first time the end of the EU has been predicted. Back in the euro crisis of 2011–2012, many also feared the end was nigh. The European Central Bank (ECB) pumped in stimulus, stronger countries agreed to bailouts and debt restructures for their weaker counterparts, and somehow everyone muddled through.

No doubt you could argue today’s challenges are in fact a continuation of those earlier struggles, and even that some of the supposed ‘remedies’ merely caused further havoc – hindsight is 20/20, as they say. My point is, though, the break-up has been considered a serious possibility before and it came to nought. If you’d dipped a toe in the water of European stocks at their low point in September 2011, you’d be up 77% today in sterling terms, despite the volatility along the way. This actually beats the UK stock market’s 58% returns over that same period.

There are good quality companies on the continent, which are still managing to grow their earnings, pay out dividends and invest for future growth. For example, the German-based health care company Fresenius, whose share price has risen almost 12% over the past year. French industrials like Thales, which services the aerospace, defence, transport and security markets, and Vinci, which specialises in infrastructure construction, are up 39% and 21.5% in the 12 months.

What’s more, with the ECB having kicked off a corporate bond buying programme last month, there’s suddenly a lot more money floating around for companies to borrow, which (the ECB is hoping at least) should drive extra business investment and economic growth.

If you want to get some European exposure at the moment, I suggest an Elite Rated fund like Jupiter European, which has Fresenius in its top 10 holdings. The fund’s manager, Alexander Darwall, has a track record of success in lots of different economic environments, largely due to his in-depth stock research and extensive meetings with company management. The Jupiter European team is considered one of the best in the business and within it, Alexander has distinguished himself. He has a knack for recognising patterns of success at the company level, which should continue to prove infinitely useful in today’s uncertain environment.

BlackRock are also renowned for their European offerings. A suite of three funds are Elite Rated, all run out of the same team, but by different managers. The BlackRock Continental European is designed not to deviate too dramatically from its benchmark in terms of weightings, making it a good candidate for a core European holding. Thales and Vinci were among its best performing stocks in the first quarter of 2016.

The BlackRock Continental European Income has, unsurprisingly, more of a focus on selecting stocks that pay sustainable and growing dividends. It will move away from its benchmark quite considerably if the managers think it is necessary to achieve this. The European Dynamic fund has a flexible mandate and a relatively concentrated portfolio of around 35 to 65 stocks. Rather than be constrained by size or sector, the manager conducts detailed bottom-up research to identify companies he believes are likely to earn above current expectations.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre

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