Trustnet portfolio users have been ramping up their exposure to the IMA Europe ex UK sector which, after seeing money flow out in the early part of the year amid a swathe of negative news, was the second most popular destination for Trustnet portfolio users in September – seeing more than £10m of fantasy investments added over the course of the month in what may be a reflection of shifting sentiment toward the continent in the wake of positive economic news from its two most important economies, France and Germany.
We speak to fund managers and market professionals in this month’s Sector in Focus about what they believe is happening in the real marketplace, and their outlook for the sector.
In the last three months the Eurostoxx 50 Index rose 11 per cent in US dollar terms, but in US the S&P 500 only rose 5 per cent leading to some disagreement over the future of this trend.
Andrew Williamson-Jones, manager of the
BlackRock Global Equity Fund said: "This is the right sort of call for the short-term. Europe is more exposed internationally and its stock markets are more exposed to cyclical industries than the US."
He added: "In a recovery cyclicals perform better than defensive industries as they can be very effective investments as customers return, and confidence and valuations recover. European stock markets may rise 5 to 10 per cent more but for higher rises there will need to be increases in revenue and top line growth. Otherwise markets will be range bound as they are approaching fair value."
Martin Bamford, managing director of
Informed Choice, also expects limited further upside. He said: "We made a decision a couple of weeks ago to go neutral from our previous overweight most of this year because we believe that we have seen the best of what will happen in the short-term - it would be greedy to hang on for more of a rally. There will be nothing special in the next 12 months. There has also been a benefit from weak sterling."
Because of the different fortunes of the various European countries, for example with France and Germany coming out of recession while Ireland and Spain struggle, Bamford highlights the importance of selective investment and said he would not use a tracker fund. He favours
CF Odey Continental European for its consistent performance and
Cazenove European for its geographical flexibility, as well as
Neptune European Opportunities.
But Ian Ormiston, fund manager of the
Ignis European Growth Fund said: "The recent appreciation was a first phase movement from apocalypse to recession. The key to this has been the financials sector which has experienced incredible rises. Therefore as companies get to more normal profitability, European stock markets will rise further."
Overseas exposure will also benefit Europe. Ormiston said: "In continental Europe and the UK recovery will be fairly anaemic, but by investing in certain companies you are not buying the economy or the market, but capturing growth outside Europe. The sales of some large companies are good because they export to a broader range of economies so they could return 2 to 3 per cent growth. Their operating leverage is not as big meaning that even a modest pick up in sales will equate to a significant increase."
But Ormiston does not think divergent fortunes of European economies are a problem for this index because it includes a number of multi-nationals. He said country exposure is becoming less important over time – especially among large caps. Areas he is cautious on include chemicals and steel as there has been a dilution of returns across the cycle following rights issues.
Ormiston added that their price-earnings ratios are not as valid as in the past. But he said healthcare stocks still offers growth and their valuations are likely to improve.
But
Katharina Hoyland, fund manager of the
Invesco Perpetual European Equity Income Fund, remains cautious on banks because of debt and lower profits than in the past.
F&C’s Paras Anand, meanwhile, makes the case for
continental Europe as an attractive source of dividends, and expects further upside.