Investors who think Europe looks cheap and are preparing to get back in and snap up some bargains should step back from the brink, according to Brian Dennehy (pictured) of fundexpert.co.uk.

Even though the results in last week’s Greek elections are positive for the continent, Dennehy says it is still not the right time to invest. 

"While Europe may be starting to look tempting for investors, it is still very much a case of look but don’t touch," he commented. 

Dennehy says private investors should look for three conditions to be met before they take the plunge. 

The first is that the cyclically adjusted price earnings (CAPE) ratio, which uses a 10-year average to take into account the effect of the economic cycle on price/earnings figures, should lower further. 

"While the ratio tells you nothing about what might lie just ahead, it does give a good sense of how cheap shares are over the longer-term and right now Europe is starting to look cheap, but we believe it will likely get cheaper," Dennehy said. 

The second condition is that investors should have reached a state of fear and panic, when everyone else appears to have given up.

Dennehy commented: "While this hasn’t yet happened I believe it won’t be far away. The time to embrace the stock market is when you are least confident and most uncomfortable, and when a discernible panic has pushed prices to lows which you can identify, in a lucid moment, as self evidently ludicrous. We aren’t there yet."

The third condition is that the markets should have fallen by around 15 to 20 per cent. 

"The trend of the stock markets euro-wide is obviously down but we are not seeing any trend that looks complete," he explained. 

"While not always easy to spot in real time, I believe stock markets at 15 to 20 per cent below the current levels would begin to look more like a complete downtrend and an opportunity to buy."

Dennehy says investors should be drawing up a shopping list of funds to buy when these conditions have been met, and he suggests they should start with three in particular: Ignis Argonaut European Income, Artemis European Growth and Royal London European Growth. 

These funds haven’t had a great time of late, with all three underperforming their sector average and all but Royal London European Growth falling short over five years. 

Oliver Russ’ Ignis Argonaut European Income portfolio is, however, one of the highest yielders in the sector; according to FE data, it pays out 6.1 per cent a year.

Performance of funds vs sector over 5-yrs



Source: FE Analytics

However, Dennehy believes funds of this type will outperform once European markets begin to recover. 

Among the top-rated funds in the IMA Europe ex UK sector is the five-crowned Jupiter European portfolio, headed up by Alexander Darwall.

Only FF&P European All-Cap Equity, which has a minimum investment of £500,000, has returned more over three and five years, and it is a top-quartile performer over 10 years as well. It is also consistently less volatile than its sector and benchmark. 

It has a minimum investment of £500 and a total expense ratio (TER) of 1.79 per cent.