Introduction
While equities were the most popular asset class in 2014, according to figures from the Investment Association, Europe was one of the least popular regions with net retail sales of just £156m. In contrast, net retail sales for UK and global equity funds were at £5.1bn and £3.2bn, respectively.
However, with the ECB last month finally announcing the start of its quantitative easing (QE) programme, with higher than expected levels of asset purchases, is there new hope for the region’s equity investors?
Russ Koesterich, global chief investment strategist at BlackRock, points out that by itself QE is “unlikely to spur European growth”. But he adds: “It should go a long way in mitigating the risk of deflation and supporting European equities, particularly in peripheral countries, where stocks are already up sharply year to date.
“In fact, the positive response in the market was partly a function of fortuitous timing. The announcement came at a time when European indicators appear to be bottoming.”
In the 12 months to January 28 2015 the MSCI Europe ex UK index has lagged its regional peers with a return of 5.2 per cent compared with 22.54 per cent from the MSCI North America index, according to data from FE Analytics.
But for the year to date to January 28 the MSCI Europe ex UK index has gained a healthy 3.84 per cent in the first few weeks of the year, while the German Dax 30 index has gained 5.16 per cent and the French Cac 40 index a 3.91 per cent return.
There are additional factors that are perhaps raising expectations for the region, including a weaker currency and the impact of lower oil prices, with Brent Crude priced at less than $50 a barrel at January 29. Although the potential consequences resulting from the victory of left-wing party Syriza in the Greek election does create some uncertainty.
Lars Kreckel, global equity strategist at Legal & General Investment Management, notes: “European equities have been perennial underperformers compared with the US since the start of the financial crisis almost eight years ago. We see no reason to change our sceptical view of the region’s long-term economic prospects, but there are a number of more temporary and cyclical factors that are coming together in Europe’s favour, which make us tactically more optimistic and ask, ‘If not now, when can Europe outperform the US?’”
He adds that with European earnings set to outgrow those in the US for the first time since the financial crisis, this should also be reflected in relative performance.
“When talking about Europe, however, a word of caution is also in order. While we expect European equities to outperform US equities this year, this comes against a backdrop of significant medium-term risks. Our concerns about the medium-term growth outlook and debt sustainability of the region remain unchanged, so we will always be more inclined to take profits in a strong rally than we would in other regions.”
THE PICKS
Waverton European
A member of the Investment Adviser 100 Club 2014, this Dublin-domiciled ¤1.4bn (£760m) fund was launched in 1999 and has been managed by Oliver Kelton since April 2010. It invests primarily in developed European equity markets and mainly in large caps. For the five years to January 28 2015 it has delivered a return of 122.59 per cent, and it has outperformed its FTSE World Europe index benchmark across three-, five- and 10-year periods.
Threadneedle European Select
This £2.27bn fund is ranked top quartile in the Investment Association Europe ex UK sector across one, three, five and 10 years to January 28 2015. Its five-year return of 91.34 per cent tops the sector, while its 12-month return of 12.16 per cent places it in the top three of the peer group. Managed by David Dudding since July 2008 the fund invests at least two-thirds of its assets in companies in continental Europe, with the largest sector weighting of 27.7 per cent of the portfolio held in consumer goods.
EDITOR’S PICK
Henderson European Focus Trust
This £173m investment trust is managed by John Bennett and aims to maximise total returns from a “focused portfolio” of continental European stocks. Launched in 1947 it entered the Investment Adviser 100 Club for the first time in 2014, and has delivered a top-quartile return across three, five and 10 years, including a five-year total return of 100.7 per cent, according to FE Analytics. It currently holds 56 positions with its largest geographical weighting in Germany at 22.7 per cent of the portfolio.
