A flash estimate put out by European Union statistical office Eurostat says annual inflation for the 18-nation strong eurozone is expected to be -0.2 per cent in December, down from the 0.3 per cent that was reported in the previous month.
Given the recent weakness of oil, it’s no surprise that energy pushed inflation lower with its 6.3 per cent slide in prices over the month. Economists warn that this should not necessarily be seen as a blip, as this could feed into inflation expectations and cause further price falls in the region.
However, European equity markets rallied on the news as the numbers add weight to the argument for the European Central Bank (ECB) embarking on a full-blown quantitative easing (QE) programme in the near future.
Confidence was also taken from the view that Europe could be encountering ‘good’ disinflation. Core inflation, excludes volatile energy and unprocessed food prices, held at 0.7 per cent and gave hope that consumers will channel money freed up from cheaper oil into other goods and services, thereby helping growth and future inflation.
In the below article, we ask three expects they tip for either the launch of full QE in Europe or the onset of a deflationary environment.
FP Argonaut European Alpha
Ryan Hughes (pictured), fund manager at Apollo Multi Asset Management, argues that European QE has now become “absolutely inevitable” after the inflation numbers, as they offset Germany’s concerns that the stimulus programme would spark too much inflation on the continent.
“You’ve seen how the market has reacted because everyone now thinks QE is coming. For most of last year the US was all about ‘bad news is good news’ and Europe has now reached that point,” he said.
“I would be thinking about having higher beta, slightly riskier European exposure rather than taking risk off. We’ve Argonaut European Alpha for over a year on the basis we thought momentum was improving and we think that will do the job quite nicely.”
Argonaut European Alpha, headed by FE Alpha Manager Barry Norris with Greg Bennett as deputy, has a strong track record, sitting in the IA Europe Excluding UK sector’s first or second quartile over one, three and five years as well as over shorter time frames.
Since launch in May 2005, it has returned a top decile 178.81 per cent, making almost double the return of its average peer and becoming the sector’s fourth best performing fund.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has a record of limited its losses in falling markets but is also positioned for a potential European recovery. Its top holdings include Italian bank Intesa Sanpaolo, Danish jewelry manufacturer Pandora and Irish budget airline Ryanair.
Argonaut European Alpha has a clean ongoing charges figure (OCF) of 0.89 per cent. The fund is also found on the FE Research Select 100 list of preferred funds.
Standard Life Investments European Equity Income
Alex Brandreth, deputy fund manager at Brown Shipley and a member of FE’s AFI panel, agrees that the deflationary numbers increase the likelihood of the ECB starting QE, which bodes well for European equities and could add to the case of owning a more aggressive fund.
However, he notes that a deflationary environment is “obviously” a concern for investors and says those worried by the prospect of this should consider an income-focused portfolio which has a more defensive tilt.
“We’ve got the Standard Life Investments European Equity Income fund, managed by Will James [pictured], on our Brown Shipley approved list and I think would do well in that environment,” Brandreth said.
“It invests in defensive equities with a high yield, which offer some stability in the fund. They are also looking for special situation low-yielders that are going to grow to have a high yield in the future. I think this structure means it can do well.”
Performance of fund vs sector and index since launch
Source: FE Analytics
The five FE Crown-rated fund has 15.9 per cent of its portfolio in Switzerland, with another 13 per cent in France and 12.1 per cent in Germany. Its top holdings including pharmaceutical companies such as Novartis, Roche, Bayer and Novo Nordisk, which are usually viewed as good defensive plays.
It has outperformed its peers over one, three and five-year periods. Since launch in April 2009 it has outperformed the sector average with an 87.18 per cent return but less volatility than the typical IA Europe Excluding UK fund and with a much lower maximum drawdown, which shows the loss an investor would have made if they bought and sold at the worst possible times.
Standard Life Investments European Equity Income has clean ongoing charges of 0.90 per cent and yields 3.03 per cent. It is also a member of the Select 100.
BlackRock Continental European Income
Stuart Ryan, investment manager at Holden & Partners and another member of FE’s AFI panel, also expects European equities to react positively to the expectation that QE is on the way but also highlights an income fund for those worried about the economic environment.
Ryan said: “We use the BlackRock Continental European Income fund. It was launched in the midst of the last crisis and held up quite well.”
“Will it then hold up in a deflationary environment? It’d be interesting to see what does manage to hold up in that environment. But we still use the fund because of our ongoing themes of income and reinvestment of dividends.”
The five crown-rated BlackRock Continental European Income fund is managed by Alice Gaskell and Andreas Zoellinger. It launched in May 2011, when the eurozone debt crisis was in full flow, and since then has returned 35.30 per cent, outperforming both the sector and its FTSE World Europe ex UK benchmark in the process.
Performance of fund vs sector and index since launch
Source: FE Analytics
It’s also first quartile over one and three years. It appears on the Select 100 and the FE Research team says the fund’s income-focus strategy has “perfectly suited the investment environment and generated unexpected results” since launch.
“Looking ahead, the fund may struggle to maintain the same level of exceptional performance, especially if the European equity markets keep rising,” the team said. “Nevertheless, there are reasons to believe that the fund managers should keep surprising investors through strong stock picking and flexible sector allocations.”
BlackRock Continental European Income has a 0.92 per cent clean OCF and yields 4.38 per cent.