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Fund managers explain why European stocks deserve another look

While the outlook for European markets continues to be clouded by elections in key economies over the course of 2017, some are urging investors to take a closer look at the opportunities available.

Rob Langston

By Rob Langston, News editor, FE Trustnet
Monday March 20, 2017

Uncertainty over the future course of the EU amid the rise of populist parties and politicians on the continent who seek to exit the bloc has deterred some from investing in Europe over the past year.

However, while many investors have eyed growth in the US some may have missed out on opportunities in European markets.

The MSCI Europe ex UK index rose by 18.62 per cent, in sterling terms, during 2016, not far behind the 19.07 per cent gain for the blue-chip FTSE 100 index.

Performance of indices in 2016

Source: FE Analytics

GDP for the 28-member EU bloc – including the UK – grew by 1.9 per cent in 2016, according to data from statistics agency Eurostat. In comparison, International Monetary Fund estimates put US economic growth at 1.6 per cent last year.

But Simon Rowe, fund manager at Henderson Global Investors, says it would “understandable if European investors opted to head for the hills” considering some of the political challenges on the horizon on the continent.

However, Rowe – who manages the five crown-rated, £1bn Henderson European Growth fund – says the “party mood” in US equity indices appears to be spilling over into Europe.

He said: “On the face of it, it is not clear why European markets are advancing ahead of elections that could, at best, confirm the shaky status quo and, at worst, threaten the future of the euro.

“A victory for Marine Le Pen would make Brexit look like a storm in a tea cup, given her stated desire to lead France out of the single currency.

“With instability in Italy and elections in the Netherlands and Germany, there is more political uncertainty in Europe than at any time since the Greek crisis.”

Yet, the manager says investors do not believe that Le Pen will win and notes previous resilience during previous crises.

Rowe, whose fund has risen by 48.35 per cent over the past three years, says the economics remain supportive of European economics.

Performance of Henderson European Growth over 3yrs

Source: FE Analytics

“Slightly more optimistic signals have been coming out of the European economy since the middle of 2016,” he said.

“Construction activity, confidence indicators and unemployment are all heading in the right direction, even if the picture is patchy and some of the moves are tentative.

“The recovery in the price of oil has also given headline inflation a short-term boost, although underlying inflation remains steady.”

He added: “This boost has removed some of the jitters about the potential risk of deflation as well as encouraged talk of when the European Central Bank will start to temper its bond buying scheme.

“This has provided a more positive backdrop for the banking sector, which has continued to rally since Trump’s arrival, although the progress of European banks has not been as dramatic as those in the US.”

Fidelity International manager Eugene Philalithis, who co-manages a number of mixed-asset strategies and is sole manager of the four crown-rated Fidelity Multi Asset Income fund, says a stronger economic backdrop has started to have a positive impact on European stocks.

He said: “As growth and inflation have picked up in Europe, the improving macroeconomic picture has begun to feed through to company earnings and share prices.

“Since the start of the year we have seen earnings forecasts for 2017 revised sharply upwards. In fact, positive earnings revisions in Europe have outpaced the global economy.”

He added: “Traditionally this has led European equities to outperform their global peers, but with poor sentiment around political risk, this is yet to occur. 2016 saw significant outflows from the asset class, and a resolution of the uncertainty could be a catalyst to reverse that undervaluation.”

Philalithis says the fundamental case for Europe is “clear” noting improving earnings, cheap valuations and under-owned.

He said: “Similarly equity valuations are attractive, in particular versus the US. Momentum however has been weak, as investors remain hesitant around political risks.”

The multi-asset specialist says sentiment may now be favouring European equities. He highlights recent findings by the Bank of America Merrill Lynch fund manager survey which reveals a shift towards an overweight eurozone equities position in December from a small underweight during the previous month.

The trend has continued into 2017, February’s global fund manager survey revealed that allocation to eurozone equities had moved to a 23 per cent overweight position, an eight-month high, as a net 24 per cent of respondents thought the asset class was undervalued.


Source: Bank of America Merrill Lynch

Philalithis added: “While this may not signify a change in trend, flows into European equities seem to have stabilised and there is likely to be less selling pressure if risks do pick up.”

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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