However, Warner (pictured) says that wider European growth still presents opportunities for fund managers and their investors. “If the US economy continues to pick up, Europe will be able to come through on its coat-tails,” he said.
“There is definitely value within Europe, but the story of the periphery coming out of negative territory has already played out in the market. The Spanish employment figures are a lagging indicator.”
Yesterday, Spain’s total figure for employment reached its highest level since the financial crisis began in 2008, adding tangible evidence that Europe’s peripheral economies, which were hit hardest from the financial crisis and the following eurozone crisis, are recovering.
Official figures show the in-work part of the country’s labour market stood at 16 million in February 2014, 60,000 more than in February 2013.
“I’m unconvinced that the markets will go racing ahead, if anything you are likely to see markets wait to see the reality of growth coming through into earnings,” Warner continued.
“If you look at places like Ireland and Spain, the markets have already done very well, so that’s not a reason to buy Europe.”
“The increases in the peripheral European markets, Portugal not so much, have already occurred in anticipation of better things.”
Performance of indices since the financial crisis
Source: FE Analytics
According to FE Analytics, the Spanish and Greek markets have underperformed when compared with the total mainland European index, which has returned 32.77 per cent since the financial crisis.
Over the same period the Spanish index returned 11.06 per cent, while Greece fell 76.19 per cent. However, in the last year both markets have picked up significantly.
Performance of indices over 1yr
Source: FE Analytics
According to FE Analytics, MSCI Greece has returned 36.81 per cent and MSCI Spain has returned 20.79 per cent compared with 14.89 per cent from MSCI Europe.
Guy Foster, head of portfolio strategy at Brewin Dolphin, is also positive on Europe.
“We like the region and are overweight Europe in our funds,” he said. “There are a few arguments that favour investing in Europe as corporate pricing power is improving and it also looks like the monetary environment is about to turn a lot more positive as well.”
“However, I wouldn’t specifically target a fund that has high exposure to the periphery. We have seen some of those sectors adjust very quickly and valuations do seemed stretched in certain areas.”
“Europe has, in the past, tended to be a good place for managers to generate alpha so we would prefer to use good quality managers and leave the decision on where to invest up to them.”
Argonaut’s Barry Norris disagrees with Warner. He said in a recent interview with FE Trustnet he was targeting Europe’s periphery, because he felt political risk was greater in the UK.
The manager of the £220m Argonaut European Alpha fund told FE Trustnet that he expected to see strong returns in these countries, particularly in the banking sector, and that improving balance sheets would drive up share prices.
“Over the next couple of years there is more political risk to equity markets in the UK than in the eurozone,” he said.
“Scotland might leave the pound and the UK might leave the European community and Labour or the Liberal Democrats might win the next general election.”
“Political risk has migrated out of southern Europe and the euro into the UK and the pound.”
Warner is hesitant to advise any particular fund to capture European growth and favours continuing to hold Odey Continental European, run by Feras Al-Chalabi.
“I’ve held it for many years and it has performed well recently. Al-Chalabi has the ability to move the fund’s geographical focus quickly, which is important in the European market.”
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
According to FE Analytics, Argonaut European Alpha has returned 35.23 per cent over three years, compared with 26.29 and 22.19 per cent from its sector and benchmark, respectively.
Brian Dennehy, managing director of Fund Expert, is also cautious about buying into a particular European region.
“No one knows what type of European fund you should buy in terms of the balance. So we simply use momentum to identify funds that are winners now.”
“We don’t need to know why they are winners today – in fact we don’t care – we just need to know that buying a fund with momentum today means, statistically, it is highly likely to be outperforming in six months.”
