Given the events of the past three years, to say the UK is divided on the question of its relationship with Europe would be a huge understatement. But look at the region from an investment perspective and the direction of travel becomes much easier to identify.
UK retail investors have been busy ditching their European exposure in recent times, with the Investment Association’s Europe ex UK sector notching up a hefty £2.9bn net outflow in the year to the end of April 2019. During that period, October 2018 was the only month in which investors put more money into these funds than they withdrew.
It’s not just retail investors withdrawing. Data from Money Management’s sister publication Asset Allocator, which covers the wealth management market, shows that discretionary fund managers have, on aggregate, pared back exposure to the region this year.
Much of this is due to renewed concerns over the outlook for the continental economy. Worries about the eurozone are such that the bloc’s equity markets can prove more closely correlated with its overall economic fortunes than is the case in other regions.
Indeed, although European stocks performed well in 2017 as domestic economies picked up, they have struggled more broadly over the past half decade. A look at other global markets shows backers of the region have risked losing out. The FTSE Europe ex UK gained 41.4 per cent in sterling terms over the five years to May 31 2019. That puts it behind the S&P 500, MSCI World, Japan’s Topix index and MSCI’s Emerging Markets index. The only major benchmark that lags Europe over this period is the UK’s own FTSE All-Share.
Past performance is not everything, but the outlook for the region looks equally gloomy. Europe is still home to economic laggards that make investors nervous. Italy, for one, has been mired in political turmoil and could now face disciplinary action over its substantial level of public debt.
Germany, traditionally seen as Europe’s economic motor, has also looked vulnerable on several fronts. The economy narrowly avoided a recession in 2018 and registered growth of just 0.4 per cent in the first quarter of 2019. Other metrics have started to reverse, too.
The country’s unemployment rate rose to 5 per cent in May – the first increase since November 2013. Business confidence slumped to its weakest level in four years during the same month.
At the same time, plenty of broader worries continue to linger for the eurozone. It contains several prominent troubled industries: banks, which have struggled to thrive in a low interest rate environment, are just one example. And trade disputes, from the US/China spat to Brexit, remain unhelpful for a region that has driven much of its past growth via exports. The eurozone manufacturing purchasing managers’ index, a closely followed gauge of export sentiment, came in at 47.7 in May. Any reading below 50 represents industry contraction.
Given all this information, clients might well feel unenthusiastic about any decision to throw money behind an imminent European recovery. But European stocks remain cheap compared with peers, and other threats, such as the prospect of imminent interest rate rises, have disappeared for now.