Europe: opportunity or risk?
How managers position themselves in Europe will be a key performance differentiator in the next year
To suggest that Europe is unloved would be an understatement. Headlines remind investors of why they should not be invested in the region daily, as eurozone policymakers try and, as yet, fail to find a solution to the region’s debt crisis.
But not everyone is avoiding the region – multi-managers and asset allocators are either required by their mandates to invest, or they worry about how much performance it will cost them relative to their peers if markets rebound.
With this in mind, how are they tackling their European exposure?
In spite of dire headlines, funds in the IMA Europe excluding UK sector have gained 5.2 per cent on average from the start of 2012 to July 5, according to FE. Admittedly, this leaves the sector behind all other developed world equity sectors except Japan, but it is not substantially below its international peers.
European Smaller Companies have done well in both relative and absolute terms. It is the second best performing IMA sector for the year to date, up 9.2 per cent, after UK Smaller Companies. Equally, there has been some strong performance from individual managers. Eight funds have posted double-digit returns year to date, including the £1.5bn Jupiter European fund and the £24.9m Allianz Continental European fund.
Eurozone risks remain
However, Europe remains an uncomfortable and perilous place to invest. Although the European Central Bank (ECB) has now cut its main interest rate and crisis appears to have been averted in the short term, economic data is weakening. This includes crucial data in Germany, which has become the pillar on which all the other eurozone economies rest. The peripheral eurozone economies are now so underpowered it is difficult to see how they will turn things around without drastic change.
That said, the stockmarket is not the economy. Oliver Russ, manager of the £264.4m Ignis Argonaut European Income fund, says: “There are a lot of companies with a high return on equity. Nestle, for example, many be listed in Europe, but it is making its money out of the rest of the world. The whole European market is very cheap – 1970s valuation levels in many cases – and the primary factor in investors’ returns is the price at which they buy the market.”
He says that the credit default swap (CDS) market – of instruments that effectively insure holders against bond defaults – considers companies such as Nestle to be a better credit risk than the majority of sovereign governments. A third of European companies have net cash on their balance sheets.
Mr Russ admits that he sets a higher bar for any companies exposed to peripheral Europe, or listed there, but he says that Spanish companies such as Inditex (owner of the Zara brand) are great companies, worthy of a place in his portfolio.