Continental Europe is such a key manufacturing, service and trading territory that it should form part of any investor’s portfolio. Yet the crisis in the eurozone has unnerved all but the most stalwart of savers.
Such fiscal waves should not be underestimated. France and Germany are dictating the pace for the other 15 member states of the euro whilst the 10 outside – including the UK – watch with concern.
Nicolas Sarkozy faces re-election early next year and is anxious not to lose France’s top credit status. Yet his weak position is evident from his poll rating which is lower than any president in the history of France’s Fifth Republic.
Whilst German Chancellor Angela Merkel dallies with the concept of an ‘inner euro’ and an outer one which has less financial discipline, savers are watching the final months of a currency union.
The mountain of debt held by Greece, Ireland, Italy, Portugal and Slovakia is alarming. Spain is not far behind. The European Central Bank is prohibited from issuing loans to distressed states although help could come through the IMF.
Talk of Brussels supervising national budgets is nonsense. Countries like France will not stand losing any further national sovereignty.
Despite these macroeconomic worries, “there are still a number of reasons to invest in Europe”, says Stacey Johnson of Investec Wealth & Management in Leeds. Measured in GDP, the European Union is the world’s second largest economy and hosts a diverse range of investable companies – many world class – and sectors which operate within a strong regulatory system.
Strong branding and customer loyalty, coupled with innovation and continued expenditure on R&D, will show good profitability for many firms, notably those which have diversified into emerging countries.
Investec favours high quality, blue chip companies run by management teams with good track records of long-term value creation.
“On traditional valuation metrics, Europe does appear the cheapest of the major developed global markets, trading on a prospective dividend yield of 5.8 per cent and a price earnings ratio of less than 10 times,” says Martin Payne, Leeds director of stockbrokers Brewin Dolphin.
He likes to distinguish between the relatively strong economies of northern Europe and parts of southern Europe which could be heading back into recession in 2012. He says there are some multi-national companies with good earnings growth prospects which just happen to be listed in such troubled economies as Italy and Spain.
For collectives, Payne tips the £143m BlackRock European Dynamic, which is relatively unrestrained and will often take large active positions at both sector and country level. It has returned 67 per cent over the past three years, comfortably outperforming the 24.3 per cent of the FTSE Europe-ex UK benchmark.
He also likes Ignis Argonaut European Income, which invests in up to 50 companies, and BlackRock Greater Europe, which can invest up to 10 per cent in emerging European stocks.
Any saver in one of the leading European funds over the last three years will be enjoying a healthy return. According to analysis by Lipper for the Yorkshire Post, such stars include:
n Henderson Private Equity Investment Trust, up 148.6 per cent;
n Threadneedle European Smaller Companies Inc, up 128.7 per cent;
n Jupiter European Opportunities Trust, up 127.2 per cent;
n Henderson HF Pan European Smaller Companies, up 119.9 per cent.
The first three are UK registered and the fourth in Luxembourg. Yet there are some disappointments, which include Julius Baer EF Black Sea (a loss of over 12 per cent), Newton European Higher Income (only 2.43 per cent rise) and Templeton Euroland B (2.78 per cent growth). This shows how important it is to regularly review holdings.
Over a decade, some funds have shown super growth, notably:
n Nevsky Eastern European, up 532.8 per cent;
n HgCapital Trust, up 363.4 per cent;
n JPM New Europe A Acc, up 339.6 per cent.
Many highly profitable companies with high levels of cash on their balance sheets and earning a significant amount of revenue outside Europe have seen their share price dragged down along with stock markets in general. Many are sitting on attractive valuations, according to Andi Murphy at advisers AWD Chase de Vere in Leeds.
He notes that some European economies – notably Germany, Switzerland and Scandinavia – are holding up well and domestic-orientated firms in those states “still have scope to perform well”.
With a continual stream of bad economic news and political dithering coming out of Europe, Murphy says it is easy for investors to panic and sell out of European stocks or refuse to buy them fearing an economic meltdown.
This is a time to stick with investment managers and management teams that are experienced and have a proven track record, says Murphy, whose firm recommends Cazanove European, JPM Europe Dynamic and Neptune European Opportunities.
The relative cheapness of European markets reflects the added risk in the region. Private client stockbrokers Bestinvest tip two funds from Threadneedle: European Select and European Smaller Companies, both run by David Dudding.
Another approach, which has the benefit of cutting charges, is to opt for an Exchange Traded Fund, such as iShares FTSE EuroFirst 100. Bestinvest says this offers exposure to the top 60 largest European companies including the UK and 40 other firms, which are selected based on size and sector representation. It charges just £7.50-£12.50 to purchase plus an annual £50 (or £100 if held in a SIPP).
Economic growth in both continental Europe and the UK is expected to be slow next year, according to Michael Clark, who manages Fidelity’s MoneyBuilder Dividend Fund and European Dividend Fund. “This is because banks will continue to have to shrink and restructure and credit will continue to be scarce.”
Despite such concerns, Clark does not expect another deep recession as experienced in 2008. “Valuations are low and dividend yields are good. There is no evidence that dividends to shareholders are at risk.”
Those seeking income, notably in retirement, should therefore consider a European fund based on companies that pay significant dividends but with little risk. Clark recommends multinationals with branded consumer goods, supermarkets, telecoms and pharmaceuticals. He says the yield is presently four to seven per cent but is likely to increase to seven to 10 per cent on average next year and even more in the case of tobacco.
Jonathan Baker, at Leeds stockbrokers Charles Stanley, likes Italy whose equities are at a 32-year low to the MSCI Europe benchmark, calling them “under-owned, underweighted in indices and unloved”. He says many good companies are based in Italy, notably around Milan.
Ted Scott, of Foreign & Colonial, sums it up perfectly: “2012 will be a fairly rocky road.” The answer is to gain the advantage of discounted shares now and to use the skill of proven fund managers, who will really earn their salaries.