Sunny outlook for europe’s hotspots

Given the rather disturbing economic and political news that has been emerging from Europe over recent weeks, it may be a surprise to learn that Europe ex UK was the place to be for the first four months of this year. The continental European portion of the MSCI index beat the world average by 3.5% in euro terms – and this despite the fact that the euro has, at last, started to weaken against the once-mighty dollar.

While it is true that performance for the larger economies has not been exciting, the fact remains that continental Europe has been delivering value to investors. Moreover, the outlook seems set to improve. It is inevitable that uncertainties will remain over the extent of future economic growth. However, they should be no worse than for other regions of the world. Indeed, the expansion of the European Union eastwards should provide opportunities, both in terms of increasing competitiveness on the world stage and by engendering a more robust consumer society.

This could do much to outweigh the demographic concerns that are present in a number of the developed European markets. Italy and Germany have ageing populations. However, the potential of a rising living standard in Eastern Europe may go some way to explaining why recent business confidence indicators have shown an improving trend, despite the damage that the strong euro has meted out to the region’s exporters.

Regulation and bureaucracy, too, may be more of a perceived threat than a real impediment to growth. True, there is clearly unease in many European countries over the measures that may have to be taken to balance government spending on welfare against maintainable revenue. Industrial action has been a feature in a number of countries. In the end, though, market forces are likely to dictate the degree of change that will become necessary.

It is an indication of the attractions that Europe offers investors that the number of funds available has grown significantly over the past five years – a period when equity investors have been bruised by market performance and suspicion over how shares might perform has become a feature of investor perception. But there clearly is demand. At the beginning of 2000 there were just 76 general European unit trusts available. Today there are 104, an increase of 37%.

And it is worth looking at the longer-term performance figures to get a degree of perspective on what can be achieved in this market. The average performance over the five years to the end of April shows an overall decline of a little over 16%. Indeed, only seven of the 76 funds delivered a positive return over this period. Yet the leader, the Odey Continental European fund, returned more than 56% – an impressive performance given the unsettled state of markets that persisted over much of this period.

The full tables also point to considerable consistency among the leading managers of European funds. Fidelity ranks number one over six months and one year with the European Opportunities fund, and remains in the top quartile over three years, where it is placed 16th, and five years, where it is 13th, despite delivering a negative return. This is not a small fund, with over 500m invested at current values, but it is dwarfed by the Fidelity European fund, which has accumulated more than 3bn. Although knocked back to seventh place in the six-month tables, it too has delivered consistent top-quartile performance over all four periods.

The Artemis European Growth fund, another 500m-plus fund, does not have a five-year track record and appears in the leader charts only over three years. Nevertheless, performance over six months and one year remains top-quartile, reinforcing the overall impression that good European fund managers can deliver consistent outperformance.

The laggards tend to show a degree of consistency as well. Those at the bottom of the table – which include some highly respected fund management houses – show persistent fourth-quartile rankings over all the periods examined for this study. Unsurprisingly, most of these funds tend to be quite small, although the Scottish Life Europe fund is 340m in size, while Royal London’s European Growth fund, ranking alongside it at the bottom of the six-month table, weighs in at 300m. The five-year track record shows these to be second-quartile performers, so it would seem that it is only more recently that performance has tailed off, driving them to the bottom of the six-month and one-year leagues.

But investors should primarily be concerned over what the future may have in store. Our own analysts are upbeat over the prospects for continental European markets. Equity market valuation levels look undemanding and prospects for economic growth could be further enhanced if the relationship between the euro and dollar continues to reinforce the growing competitiveness already helped by the migration of manufacturing industry to the eastern fringes of the EU.

It is little wonder that these business confidence surveys make better reading than used to be the case. Europe is a big market and one that should surely be represented in a broadly diversified investment portfolio. The reality is that the overall value of the European stockmarkets in aggregate still lags those of Britain and America in terms of their relationship to GDP. This could change, particularly if confidence returns to equity investors. And there is plenty of quality choice available for those seeking European exposure.


Head of the Gerrard intermediary division