European equities: the future drivers of returns

That said, Europe still has potential pitfalls of which investors need to be wary. A pertinent reminder came via the sale of Spain’s fourth largest bank, Banco Popular, to Santander earlier this month for €1 – yes, one euro. Shareholders waiting for a turnaround would have been sorely disappointed seeing the value of their investment plummet to zero in the final days of hasty selling before the announcement. Anyone buying a European index needs to be especially wary of picking up this kind of exposure.

Stock selection

Better, in my book, is to go with a fund that is notably selective about its stock and sector exposure. Henderson European Focus, with just 46 holdings as at end May, is a good example. Managers John Bennett and Asim Rahman analyse macroeconomic and industry themes as an integral part of their process, before applying individual stock criteria, which provides a double filter, if you like, for value and other traps.

Meanwhile, although Mr Draghi may be comfortable signalling the end of rate cuts, substantial quantitative easing is still in play and this has arguably inflated asset prices. European equities may be reasonably valued compared to their US and UK counterparts, but they are nonetheless trading only just below their Schiller PE 10-year average. So we are not looking at an extraordinarily cheap market and if the ECB does have to take its foot off the easing pedal more rapidly than expected, volatility could become an issue. 

Another high quality concentrated option I like for this climate is BlackRock European Dynamic. Or, for smaller company exposure, Mirabaud Equities Europe Ex UK Small and Mid does a good job of finding the hidden gems.

For some UK exposure, Threadneedle UK Extended Alpha is an interesting option that lets you play both sides of the coin, as it takes both long and short positions in UK equities. Under the tenure of Chris Kinder since 2010, the fund has generated strong outperformance. 

 *FE Analytics, all funds in IA Europe Ex UK, IA Europe Inc UK, IA European Smaller Companies, IA UK Smaller Companies and IA UK All Companies sectors. Total returns in sterling. 23/06/2016 – 19/06/2017

Darius McDermott is managing director of Chelsea Financial Services

Key points

The FTSE has soared to 7,500.

European stocks have been overlooked, but are performing strongly.

It is best to go with a fund that is selective about stock and sector exposure.