The crisis in the single European currency zone has been the greatest influence on markets this year and arguably since the beginning of 2011. The burning question is whether the euro can remain in its present form, with all its members staying in the club. The recent G8 meeting in Washington did not result in any new insights as to what the solution might be and markets continued to demonstrate the nervousness that has epitomised investor attitudes.
While no equity market has escaped the downturn in sentiment, Europe has suffered more than the others for the obvious reason that nobody knows what the consequences of a Greek withdrawal from the euro might be. The IMA sectors’ averages to the end of April this year put Europe ex UK at the bottom of comparable markets, down nearly 0.5%. While European Smaller Companies fared rather better – up more than 5.5% – this was still worse than Britain and North America.
The longer term numbers make even more depressing reading, with both European sectors trailing the pack over one, three and five years. Indeed, over five years these are the only two sectors to deliver negative returns, and this is to the end of April. The figures to the end of May seem certain to be even worse, given the recent turmoil in markets.
Smaller company funds have performed better on average consistently, though some of the mainstream European funds have delivered remarkable performances, given the conditions. The best performances over longer time frames have come from the Europe ex UK sector, with BlackRock European Dynamic notable for delivering consistent performance throughout – only missing the top five once in the four time frames reviewed when it came seventeenth over one year. (Trends continues below)
It would be unwise to draw too strong a conclusion from the comparison of smaller companies’ funds with those investing in larger cap stocks. There are just 13 funds in the small cap sector, compared with more than 100 in Europe ex UK. But the swings in returns are significant in both sectors. Over five years the performance varies from plus 23% for the sector leader (fourth in the combined rankings) to a loss of nearly 26%.
This latter performance came courtesy of JPM Europe Smaller Companies fund, which has suffered a disappointing performance over all time frames, propping up the tables on each occasion. This pales into insignificance when set against the larger sector. The Fleming Family & Partners European All Cap Equity fund returned a generous 50% plus, while the tail ender, Artemis European Growth, lost nearly 36% in value.
For the future it is hard to be certain how things might pan out. Fund managers will be conscious that value does exist in European markets, providing growth can be restored to the economies struggling with debt and cut backs in government expenditure. The communiqué issued by the G8 leaders mentioned “growth” about three times as often as the word “austerity” appeared. The problem seems to be that the electorate in the eurozone are becoming tired of the need to constantly lose ground in terms of living standards.
The answer, of course, lies with Germany – and even here the general population are likely to have their say. Voters in Germany are widely believed to be against any further hand-outs to nations that have managed their economic affairs badly, but a break-up of the single currency zone is likely to have as disastrous effect there as anywhere. Five years ago Germany had the highest unemployment rate in the eurozone. Today it has the lowest, helped by booming exports on the back of a week currency.
”Outcomes are impossible to predict at present – hence recent selling pressure”
Moreover, it is believed that the Bundesbank has outstanding loans to the central banks of the embattled southern countries of many hundreds of billions of euros, equivalent to as much as a quarter of German gross domestic product. With this level of commitment, standing aside does not seem an option, but the nation’s leaders will be only too aware that the roll call of politicians thrown out by electorates tired of the lack of resolution to the euro crisis is long and growing.
Perhaps that is why Germany’s central bank is rumoured to be softening its stance on inflation. It may be that politicians say one thing, but do another. The fact remains, though, that outcomes are impossible to predict at present – hence recent selling pressure. European shares have suffered in this uncertain environment, more so than other major markets.
Good news could produce a strong rebound, but it is a brave man who bets against the crowd at present.