Home > Investments > European
Sector Comment: Narrow goalposts in the eurozone
The eurozone has been in the news for all the wrong reasons since the start of the year.
The Greek situation seemed to find no adequate resolution – either it was bailed out by the rest of the eurozone, potentially compromising the recovery of other countries, or it was left to default on its sovereign debt, which would have been dramatically destabilising.
The situation has inevitably been reflected in the performance of funds. Year to date, funds in the Europe ex UK sector have the worst average performance of all sectors, dropping 5.6 per cent to 10 February. This is in line with the FTSE Eurofirst 300 index.
Most managers report an increase in sovereign risk, and even the hardiest stock pickers are increasing their country-specific analysis.
The view of Chris Rice, manager of the Cazenove European fund, is typical: while he isn’t avoiding the weakened countries of Portugal, Italy, Greece and Spain altogether, he recognises companies within those countries will face significant headwinds and needs to see that reflected in valuations.
For the time being, the focus has moved away from eastern Europe as a potential source of trouble. In fact, those managers with selective exposure to that region benefited from a huge recovery in share prices last year.
The MSCI EM Europe index rose 73.5 per cent, outperforming its Asian and Latin American equivalents. Many European companies are still benefiting from the growth of eastern Europe – either as a source of cheaper labour, as with the car manufacturing sector, or as a market for their products, as with some of the banks.
Managers in general, however, seem to be reigning in those higher-risk bets, with many adopting a defensive portfolio positioning. For example, Cedric de Fonclare, manager of the Jupiter European Special Situations fund, is largely avoiding domestically focused companies and instead looking for companies with solid international franchises.
At the same time, however, most agree European stocks look well-priced. Mr de Fonclare says: "Valuations are very cheap compared with history and compared with other markets."
