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The dangers of confusing economies with stockmarkets

Written by: Adam Lewis
Since the global financial crisis, Europe seems to have lurched from one crisis to another.

Greek bail outs, fears of the collapse of the euro, political stand offs, problems in the so-called peripheral countries such as Spain and Italy, and several actions taken by the European Central Bank, have all created a sense of unease when it comes to thinking about investing in the region.

However, while it is always right to be naturally cautious, the problem with adopting such a stance is that you are assuming what is going on economically and politically within a region, is the same as what is going on at a stockmarket and company level. The two things are not the same.

Indeed Europe, like most global stockmarkets, has had a tough start to 2016, which may reinforce fears of investing. However, once again most of this has been driven by macroeconomic headlines, rather than anything negative that the actual companies are doing.

Stephanie Butcher, a European equities fund manager at Invesco Perpetual, says: “If one’s view is that we are going into a global macro recession then you don’t want to own European equities. This is because the truth is that they act as a high beta variation on the macro environment, so it is is not surprising that European markets have started this year poorly.”

At present however the two main areas of the world people are concerned about are the US and China, and it’s Butcher’s views that these concerns are overstated and that actually the outlook for global stock markets, while not super robust, is okay. As such, with the markets having been so nervous over recent week, she contends now is a good time to be looking at equity opportunities again.

In terms of the developed markets, Europe outperformed the US and UK in 2015, only being beaten by Japan and fund buyers have been increasing their holdings in the region.

One such manager is Apollo Asset Management’s Ryan Hughes. He says it is always dangerous to write off whole regions on the basis of politics and economics, rather than looking at its corporate prospects, because in such a large area there are many companies that can, and do, win out.

“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,” he says. “We have favoured Europe for the last 18 months, which did well for us last year but has been painful at the start of this year.”

With such a large region and a large number of companies to choose from the key to winning in Europe, adds Hughes, all boils down to stock selection.

He says: “It has been this way for the last 10-20 years and will continue to be so because it is such a diverse area. This points towards stock picking fund managers who are prepared to be very different to the index.”

Now you may think all fund managers are so-called stock pickers. That is their job. But the ones Hughes is alluding to are those who are not afraid to be very different to their benchmark. This is because he says that in 2016 if you simply look to replicate the index either through a tracker fund, or through a fund that is very similar to it, you will not do well.

“You need to find managers who are prepared to back their convictions and find the industry champions, as these will the stocks that are rewarded the most, not the companies which just make up a large part of the index,” he says.

With this in mind Hughes favours the Argonaut European Alpha fund, which is managed by Barry Norris. He says that Norris is a fund manager who looks to find companies within Europe that can surprise the market on an earnings basis.

Invesco’s Butcher says her strategy on the Invesco Perpetual European Equity Income fund is focused on the valuations of companies and is style-agnostic. This means over time she will shift between looking for growth and value companies, depending on where she sees the best investment opportunities.

While the past few years have favoured investing in the growth companies, Butcher says today company valuations favour the more value-orientated stocks and that is where she is tilting her fund, more so than typically.

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