Europe continues to be a market riddled with uncertainty, as relatively muted earnings growth, weak economic momentum and political risks have all served to turn investors away from the sector. 
On the face of it, risks are everywhere courtesy of the ongoing Brexit saga – while Italy fell into a technical recession in the final quarter of 2018, after its economy shrank by 0.2 per cent.
Indeed, ‘recession’ has become a recent buzzword. Many column inches are covered by stories claiming Germany and France were set to follow Italy after a collapse in industrial output at the start of 2019 – although the former has since released figures showing it has narrowly avoided the “R word” having registered zero growth in the final quarter.
Brexit continues to hang like a 'sword of Damocles' over not just the UK economy, but the wider European one as well, with no real solution in sight. The result is investors have voted with their feet, with almost £1.3bn of net outflows from European equities in 2018*, according to figures from the Investment Association.
BlackRock’s geopolitical risk dashboard – which continuously tracks the relative frequency of analyst reports, financial news stories and tweets associated with geopolitical risks – has Europe at one of its highest levels in the past decade at 2.74 (on February 15, 2019), the only time it was higher was in October 2011 at the height of the sovereign debt crisis (when it peaked at 2.87).
Regardless of whether markets are at, near, or simply pricing in a recession – this is the environment where bargains are most likely to be found. Europe is still home to some of the biggest companies in the world which transport their goods globally and, crucially, Europe as a region is still lagging behind the US since the global financial crisis of 2008 with the sovereign debt crisis of 2010-12 resulting in a delayed recovery for the region.
This presents opportunities to investors. For example, the MSCI Europe price-to-earnings ratio (the ratio for valuing a company that measures its current share price relative to its per-share earnings) shows investors can still access European equities at a five-year lows (as at the end of December 2018), a reflection of the volatility seen throughout last year. If volatility brings opportunity, this means bargains could be aplenty making Europe a good hunting ground for stockpickers. Here are three funds to consider in this scenario.
Janus Henderson European Selected Opportunities
Experienced European equity manager John Bennett uses sector analysis in his process, focusing on under-researched opportunities. The resulting high-conviction portfolio of 50-65 mega- and large-cap stocks has neither a growth nor a value bias.
The fund manager tends to look for companies which have been badly managed but are not necessarily bad businesses – meaning they can prosper in the long-term. The fund therefore holds mostly out-of-favour companies trading on cheap valuations.
The fund is up 39.5 per cent** over five years.
Waverton European Capital Growth
This is a high conviction fund focused on finding reforming large and medium-sized European businesses, which can create wealth and returns for shareholders.
The managers believe that only a third of European companies are run for shareholders. They avoid weaker businesses with poor corporate governance and instead focus on finding companies with five key attributes; aligned interests, earnings visibility, pricing power, cash generation and return on capital.
The 37-stock portfolio has been managed by Chris Garston and Charles Glasse since its launch in 2001 and has returned 49.7 per cent** in the past five years.
Jupiter European Opportunities Trust
This trust offers investors access to a high conviction portfolio of European equities with a bias towards medium and larger companies.
Fund manager Alexander Darwall’s approach is to invest in businesses which are managed for the benefit of small shareholders. He does this by focusing on companies with a proven business model whose products are in universal demand and are not especially price-sensitive. Alexander has developed a real aptitude for recognising patterns of success in company business plans and management teams. This skill, combined with his patient and value-aware approach, has provided shareholders with excellent returns on a medium- to long-term basis.
The fund is the best performer in the IT Europe sector over five years, returning 71.2 per cent**.
Darius McDermott is managing director at FundCalibre. The views expressed above are his own and should not be taken as investment advice.
*Source: Investment Association, 7 February 2019, combining the IA Europe ex UK, IA Europe Inc UK and IA European Smaller Companies sectors.
**Source: FE Analytics, total returns in sterling, five years to 18 February 2019.