Achieving diversification in a European Equity portfolio

This article is part of
Guide to European equities

Achieving diversification in a European Equity portfolio

The market has a very fixed idea about the world right now, according to John Surplice, head of European equities at Invesco.

He says that while the market is presently shunning any of the myriad companies that are losing out as a result of the economic uncertainty resulting from the pandemic, such as airlines, “a vaccine changes this”.

With a sharp market shift likely if the global health situation improves, Mr Surplice believes that companies such as Ryanair would experience a rapid share price climb, and so represent real diversification in the current market conditions. 

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Niall Gallagher, European equity fund manager at GAM, is also a fan of the shares of the budget airline.

He says: “Ryanair is one of the best capitalised airlines; it has a very strong balance sheet, so we know it will be around in future when air travel does return. It will be one of the beneficiaries, especially if not all of its rivals survive and capacity in the industry is lower.”

He adds that investors will need a “totally different portfolio” if inflation rises, and that this is an area where those considering how to diversify should be focused.   

Blake Crawford, who runs the JP Morgan Europe Dynamic Ex-UK fund, says the dividend yield offered by many shares in the economic bloc is a key differentiator with other markets and one of the ways in which European equities can act as a diversifier. 

He says: “The composition of the European benchmark has changed significantly over the past decade.

“Cyclical financials are now much less of the overall index, while consumer staples and healthcare segments have been steadily growing. Technology has also grown significantly and appears to be much more agnostic to political and economic cycles.

“Europe is a leader when it comes to cash flows and dividends. European equities’ dividend yields compare favourably versus the US, emerging markets and Japan.

“The policy response to the pandemic and continued quantitative easing has ensured that comparable yields in government bonds and corporate bonds remain at depressed and significantly lower levels.”

Key Points

  • Investors have to think imaginatively if they wish to diversify
  • Europe is a leader in terms of cash flows and dividends
  • Large-cap, quality growth companies have won over defensive small-cap companies

Ben Richie, head of European equities at Aberdeen Standard Investments, says the eurozone stock markets are among the most diversified in the world, but that while this has many advantages, it has not helped investors in recent years.

He says: “The European market is pretty well-balanced compared with many. There is no dominant sector with only pharmaceuticals as a sub-sector that is more than 10 per cent.

“That has worked against it at a time when technology has been so strong when compared with the US or even emerging markets, but it does mean return streams are more diversified. We can also find a nice balance between defensive and more growth-oriented assets within the market.”