BLOG: Should we invest as well as holiday in Europe?
When it comes to our summer holidays, Europe is by far the most popular destination for us Brits. But, when it comes to investing, the continent isn’t top of the list.
A survey of 2,000 adults by Jet2Holidays – which has recently been named the UK’s largest tour operator – revealed that all top ten holiday destinations were in Europe, with Italy, Greece and Spain topping the list for Brits travelling abroad.
But when it comes to our investments, the Continent is one of our least favourite. Figures from the Investment Association show we’ve been taking money out of European equities for the past five years – a huge £11bn has been withdrawn – and this trend has continued in the first three months of 2023.
So are we missing out on opportunities or are we right to put our hard earned savings elsewhere?
Reasons to be positive about European equities
It’s important, first and foremost to remember that Europe is a big place – it’s home to 50 countries and thousands of companies. So the choice is huge for investors.
The ongoing war in Ukraine, strike action, protests and the threat of recession are all weighing on minds, but there are areas of opportunity. And, over the past year, despite all its challenges, the European stock market has risen more than 16% – outperforming the UK, US, Japanese and emerging markets.
It’s also important to remember that while many companies will be reliant on local markets and economies doing well, as Niall Gallagher, manager of GAM Star Continental European Equity points out, “more than half of the profits and revenues of European companies now come from outside Europe.”
Many, instead, come from Asia, especially when it comes to luxury goods, and China’s reopening – although more muted than anticipated – has been beneficial for many European firms.
Smaller companies have struggled
“Economic uncertainty has driven many investors towards larger companies with perhaps more predictable and growing profits like LVMH,” said David Walton, manager of IFSL Marlborough European Special Situations fund. “ The smaller more cyclical companies have underperformed the market but that could reverse as some of the negative factors that have weighed on growth lighten.”
Walton says that smaller companies can benefit from a pick-up in economic growth that is expected in 2024 and 2025.
Another reason to favour European equities today as Tom O’Hara, co-manager of Janus Henderson European Focus fund recently pointed out, is that they are cheap. The weaker euro also makes the region’s products more competitive in his view.
Benjamin Moore, manager of CT European Select agrees. “Company valuations have been reset due to higher interest rates and, over the long-term, share process tend to follow earnings,” he said. “As a result, good companies can continue to grow, and their lower valuations have created opportunities.”
Funds to consider
Investors wanting to buck the trend and invest in European equities have a vast choice of funds to consider. Here are four different options:
Comgest Growth Europe ex UK
Comgest has a strong track record investing in European equities going back to 1989. This is a high conviction fund, and the team looks for quality companies that can sustainably grow their earnings over time. It invests for the long-term, ignoring short-term market noise. The managers also work as analysts and are free to look at companies in any country or sector.
The managers of this fund try to identify companies with first class management teams, strong business models exposed to the drivers of long-term growth, and sustainable returns on capital. Their investment approach is centred around achieving a depth of understanding in businesses and identifying the risks to their business models and growth expectations.
LF Montanaro European Income
Montanaro has a simple philosophy: invest in companies you can understand, buy things which are growing, back quality management, engage with your companies and don’t over trade. This fund is no different, buying quality mid- and small-cap stocks across Europe. Each holding will also offer an attractive dividend yield, or the potential for dividend growth.
BlackRock European Absolute Alpha
This fund’s managers employ a fully flexible investment approach in order to try and create positive returns regardless of market conditions. They have a key focus on capital preservation and low levels of volatility, which is achieved by investing in companies whose share prices they think will rise (longs) and by ‘shorting’ stocks where they believe the share price will fall.
Darius McDermott is managing director of FundCalibre