European  

Insight: Europe excluding UK

Europe has been a difficult continent to invest in over the past five years. It may not have been an investor’s first choice for portfolio allocation. Having been plagued by a series of economic difficulties around the continent – particularly those in the eurozone –the region has faced immense troubles.

Starting in 2009, the European Union told France, Ireland, Greece and Spain to each reduce their budget deficits, but it became clear by December that year that it would be harder for Greece, as its debts reached €300bn – the highest any country had seen in modern history – amounting to 113 per cent of its GDP. The eurozone’s debt limit is 60 per cent.

Troubles in the countries continued for years after, with various downgrades along the way. Cyprus, France, Italy, Spain and Portugal all had their credit rating downgraded by S&P and Fitch even downgraded the UK from AAA-rated to AA+ due to a weakened economic outlook, but the agency said while its outlook is stable, there is no further threat to any further action taken.

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But, in more recent news, European Central Bank (ECB) president Mario Draghi introduced a new wave of measures to help stimulate the eurozone economy, including cutting the deposit rate for banks from 0 per cent to -0.1 per cent in order to encourage banks to lend to businesses rather than to hold on to money.

But since, developed markets have come back with a vengeance, with a strong performing 2013. Despite European markets not performing as well as the US, it still saw strong returns – the MSCI Europe index rose by roughly 20 per cent.

Things seem to be improving for European funds. According to recent figures from the Investment Management Association (IMA), the Europe space – which comprises the Europe excluding UK, Europe including UK and Europe Smaller Companies sectors – saw inflows of £285 net retail sale, up from the average for each of the previous 12 months which was £172m.

Things have changed around in the last 12 months for the European excluding UK sector. April saw inflows of £191m, up from £37m in March this year. This is a stark difference to April 2013 when the sector saw outflows of £42m. The number is staggering compared to its counterpart sector which includes the UK, which saw inflows of just £9m in April.

European equity funds were in fact the third best selling sector, after UK and Global equity sectors. The IMA stipulates funds within the sector must invest at least 80 per cent of their assets in European equities and exclude UK securities – although they can be up to 20 per cent of the fund’s allocation.

Improving markets and fund inflows have been raising questions as to whether Europe could be 2014’s stand-out market performer. Better economic flows have increased business confidence in peripheral European companies, which improves investor sentiment and why the sector has been seeing an increase in performance and flows into the funds. Even Greece, Ireland and Spain have seen their markets increase with the MSCI country indices improving. A solid effort to reform the eurozone has been a success, with various continent-wide austerity programmes taking place.