An economic recovery is underway in Europe but it is still in its early stages, according to Seneca’s Peter Elston (pictured).
The global investment strategist explained that, at the end of June, Seneca increased its exposure to European equities to a 4 percentage point overweight position relative to its core allocations.
While some investors remain nervous on the region because of the Greek debt crisis and the UK’s impending EU referendum, he believes that Europe can still provide plenty of opportunities for investors.
“We had felt that there had been a reasonable correction over the prior two months, with the Euro Stoxx 50 index falling by around 10 per cent from its April highs,” he explained.
Performance of index between April and June 2015
Source: FE Analytics
“Furthermore, we remain optimistic that an economic recovery is underway in Europe but that it is still in its early stages. Unlike in the US, where unemployment started to fall more than five years ago, in the Eurozone the employment situation only began to improve in mid- 2013. Thus while the unemployment rate has fallen, it is still high at 11.2 per cent, meaning that monetary policy will remain likely very loose for at least the next couple of years.”
“We feel that this, combined with profit margins that provide scope for improvement and dividend yields that are reasonable, bodes well for European equities.”
However, some investors remain bearish on the region because of its popularity among investors and its increase in valuations.
In an article published in June, Premier’s Simon Evan-Cook told FE Trustnet that he was beginning to become concerned about the potential for consensus trading, despite liking European equities.
Patrick Connolly, head of communications at Chase de Vere, agrees that Europe is one of the most positively-viewed areas of the market at the moment, as many investment managers see appealing value or companies that offer the best growth opportunities.
“We have, and have done so for some time, retained at least a neutral position on Europe and that still continues to be the case today. It’s easy to get distracted by all the noise. Yes, there have been issues in Greece that are still not properly resolved and yes, there are issues in the eurozone that have been around for a number of years now that are still not resolved,” he said.
“The way we would look at it is that there are still many excellent quality companies in Europe that are still performing well and making good profits. About half of the revenue from the eurozone companies comes from outside the Eurozone as well, so we try not to get distracted by anything we think is short term or at least background noise. Our position on Europe is, certainly over the medium term, reasonably positive.”
Elston also believes that the Greek debt crisis is short-term noise, in spite of many people worrying that the ‘resolution’ to the situation has been nothing more than kicking the can down the road.
While the situation is far from over, he says it has provided a stellar opportunity to invest in Europe.
“It was the uncertainty in relation to the Greece situation that gave us the opportunity to increase our European equity exposure at lower levels,” he explained.
“Now that there is more clarity with respect to whether or not Greece remains in the Euro, we would expect investors to refocus on Europe’s better fundamentals.”
Since the start of the year, the MSCI Europe ex UK index has returned 8.62 per cent, almost doubling the performance of the FTSE 100 and the MSCI World over the same time period.
Performance of indices in 2015
Source: FE Analytics
Not only has the market showed signs of the recovery, many investors are reassured by the continuation of quantitative easing in the region, which is expected to remain in place throughout this year and next year.
Adam Laird, passive investment manager at Hargreaves Lansdown, says that an additional tailwind for Europe is the fact that it won’t be as drastically affected by the impending rate rises from the Federal Reserve and the Bank of England over the coming months.
“Generally speaking, we’re quite positive on it. It is a key market for investors to be in. it’s something that remains quite core for a lot of UK investors’ portfolios given that it’s one of our largest trading partners,” he said.
“Obviously the market has risen quite a lot this year, but we still think that it’s not looking unfairly valued. We think that one of the concerns at the moment for the UK and the US is a rise in interest rates, but it’s likely that it’s not going to be as much of an issue in Europe given that there are still concerns about debt levels in some peripheral regions and that the QE programme is still running and expected to carry on for some time.”
There are a number of active European funds that the team at Hargreaves Lansdown particularly like.
Laird’s favourite tracker, however, is the Legal & General European Index fund, which he says is managed by a well-resourced team at L&G, is accurate in relation to its benchmark and is a low-cost way of accessing the broad European (excluding the UK) market.
Awarded four crowns by the FE Passive Fund Rating system, the £2.2bn tracker has a top-decile tracking error rating of just 1.87 over five years, having underperformed its FTSE World Europe ex UK benchmark by just 1.21 percentage points on an annualised return basis.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Legal & General European Index has a clean ongoing charges figure of 0.12 per cent and yields 2.7 per cent.
In terms of active funds, Connolly likes JPM European Dynamic, Blackrock European Dynamic and Threadneedle European Select, as he believes that the managers of each fund have a proven track record, have flexibility in terms of where they invest and have a competent team behind them.
“What you have here are three good-quality, long-term active managers that have good performance records and we believe are well-positioned to perform well in the future,” he said.
However, while the head of communications likes Europe at the moment, he warns that the region is far from perfect because of the steep incline of its stock market.
“We’re not going to say that now is a screaming time to buy into Europe. What we are saying is that, over the medium- to long-term we’re still pretty relaxed having money in Europe. But, short term noise will create volatility and markets have gone up a long way. There will be periods where the market will fall back and, if you’re jumping in now, you’re jumping in after six years of strong performance,” he warned.