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.
The sector is benefiting from a number of factors that are currently combining to make it look increasingly attractive to investors. First, and quite possibly foremost, has been the surprising economic performance of some the continent’s largest players; European equities have traditionally been unpopular with UK investors, the continents economies were thought of as sluggish and uncompetitive and generally lagging behind the UK. When both France and Germany came out of recession unexpectedly early in August 2009 however, coupled with a distinct lack of good news about the UK economy, investor’s attention was understandably drawn across the channel.
Secondly, European equities have been performing well during this phase of market recovery. The IMA European Smaller Companies sector tops the performance tables for the third quarter of this year, returning 25.80 per cent. The IMA Europe ex UK sector comes in second with 24.66 per cent, and the IMA Europe inc UK sector completes the hat trick with third sport and a three month return of 22.87 per cent. This compares favourably to UK equities despite the phenomenal run of the FTSE, the IMA UK All Companies sector returned 22.03 per cent over the same period.
Source: Financial Express Analytics
As doubts about the strength of the UK economy persist, Europe looks an increasingly attractive proposition. Investors with fond memories of holidays on the French or Spanish Rivera’s might favour European equities as being more familiar, as opposed to the overtly foreign markets of Japan or China. This does not mean any of the old problems have gone away.
The slow response of the European Central Bank (ECB) to the credit crunch highlights the difficulty in setting monetary policy for 16 different countries. This is likely to cause a problem; for while France and Germany have started to recover many member states have not; unemployment across the euro area rose to 9.6 per cent in August. There is still a high probability that the necessary monetary policy juggling act will slow done the economic recovery of the euro zone as a whole, although this is by no means certain and there are many who would argue to the contrary, it still poses a risk.
In addition, many of the structural problems that were an issue before the credit crunch, such as labour market inflexibility, still persist. While our European neighbours have been smugly denouncing Anglo American capitalism, there is still more pain to be suffered by highly leveraged European banks as the full cost of bad loans is realised; European companies tend to be far more dependent on bank financing than the capital markets and this could have a severe knock-on effect on the economy.
European markets do offer plenty of opportunity, however. The Lisbon treaty, should it be ratified, could pave the way for further institutional reform and aid long term growth. Even if doesn’t, a positive top down view is not always essential to successful investing. Jamie Ramos Martin, manager of the Standard Life European Equity Growth fund, believes there are good value opportunities where stocks have yet to be priced for a recovery.
The Euro Area is home to over 320 million people and offers a huge array of stocks and opportunities, as well as offering a significant level of diversification across countries. The prospects of higher growth and greater diversity are likely to ensure European equities only increase in popularity.