With EU expansion helping to revive the manufacturing industry, and the euro gaining ground against other major currencies, the case for investing in Continental Europe is still compelling.
Europe: investment area of opportunity or a spent force in the global game of economic expansion? Given the way in which European markets have performed so far this year, the smart money has been on the side of opportunity. We may be seeing zero growth in Italy, social unrest in France and worries in Germany over the cost of maintaining the welfare system, but share price performance is telling us that Europe is far from being a busted flush.
Part of the optimism stems from the expansion of the European Union into the countries of the former Soviet bloc. Aside from the millions of potential additional consumers, a new source of cheap, well-educated labour has come on stream. And not a moment too soon. With China fast becoming the world’s factory, finding that competitive edge has become crucial if the European manufacturing industry is not to fall into an abyss.
Germany, in particular, has benefited from the ability to shift certain manufacturing processes to the east. Business confidence surveys suggest the corporate sector is becoming convinced the corner has truly been turned. This new-found confidence is borne out in production figures, which tell an improving story. The result of last year’s election in Germany may not have delivered the decisive result that many craved, but even that appears to confirm that a more realistic approach is now being taken to the country’s past economic problems.
But it is easy to argue that the changes are in the price, so far as markets are concerned. Continental Europe has delivered solid returns to investors over recent years. The Dax index, which tracks Germany’s leading companies, has recorded one of the biggest gains of any developed market since the bear phase came to an end three or so years ago. Even so, valuation levels remain undemanding in an international context. The case for Europe continues to look compelling, even if the easy money has already been made.
Two factors stand out when it comes to determining whether the Continent is a suitable place to investment. First, the economic signs are as good as they have been for some time. Employment numbers are beginning to improve, while Eastern Europe has unleashed a host of skilled workers into the more developed nations, plugging skills gaps that were impinging upon economic performance.
Second, the euro looks set to continue to make ground against other major currencies, most notably the dollar. After a lengthy period of loose monetary policy and relatively low interest rates, improving economic data is encouraging the European Central Bank to lift rates and generally tighten the screw. Even so, rates in the eurozone remain significantly below those of America and Britain.
A further factor is the growing Europisation of business in a market that is achieving a degree of homogeneity. Bourses in Continental Europe have lacked the reach of their Anglo-American counterparts in the past, with bank debt a preferred means of sourcing capital. Even now, the London market appears much more developed than those in Paris, Brussels or Frankfurt. But globalisation is making the home country of many businesses less important, while rumours abound of a Europe-wide link-up of stock exchanges, perhaps as a protectionist move against the might of American exchanges.
As to where investors should be entrusting their money to ensure they are not left out of any continuing growth on the other side of the Channel, there are mixed signals from the performance tables. Fidelity European, arguably the most consistent of the mainstream funds, has had a torrid time of it over the past six months or so. Ranked number three over five years, it slipped to 103 out of 105 in the six-month tables – a fall from grace only equalled by Crispin Odey’s Continental European fund. From being placed second in the five-year tables, the fund is propping up the six-month charts at number 105, albeit with a positive outcome of plus 12.4%.
There are some impressive consistent deliverers of performance, though. For example, Jupiter and Tilney have remained first-quartile throughout all four timeframes. True, the Tilney European Growth fund did slip to 22nd over one year – its lowest ranking in the tables for five years – while Jupiter European Special Situations languished, if you will excuse the expression, at number 13 in the six-month tables. This was the lowest position it reached during the four timeframes measured, although even that performance cannot match the Artemis European Growth fund, which leads over five years and was in the top five over one and three, falling to number 11 over six months.
The Neptune European Opportunities fund is certainly due a mention. Although it was not around five years ago, it has succeeded in topping the tables for six months, one year and three years. Valued at only 15m, it goes to show that pure performance is not always fully appreciated.
The Fidelity European fund, by contrast, is worth in excess of 4.5bn. While the consistency of this fund in the past is surely worthy of recognition, it would be naive not to recognise that the higher profile and greater marketing clout of this investment leviathan may have played its part.
For the future, it is hard to ignore Europe, even if it would be foolish to expect the recent significant gains to be repeated. Our cousins across the Channel still have ground to make up on the economies of Britain and America, but the signs are encouraging.
European enlargement is creating an environment where the combination of a competitive labour market and growing consumerism suggests the challenge from East Asia can be met foursquare. It remains an area to favour in an investment world looking trickier the higher markets rise and the more volatility returns to unsettle investors.