Multi-manager opinion: Is Europe offering opportunities to invest?


Brookes Marcus SchrodersMarcus Brookes is head of multi-manager at Schroders

The performance of the European equity market has been pretty volatile over the first two months of the year, but it remains a key overweight in our portfolios.

When we survey the investment landscape looking for undiscovered investment ideas it becomes increasingly obvious that there is very little value left in markets, which should not be unexpected after a seven-year bull run from the depths of 2009.

Emerging markets have been moving in the right direction for some time now, but Europe remains relatively more attractive as it has a lower risk profile and is arguably cheap enough to still add returns.

Investors have been very keen on the US equity market as it has had a good economic recovery and a helpful central bank that stands ready to act if needed.

The same had not been true of Europe until last year, when it emerged from a self-inflicted slowdown with a newly unshackled ECB that was now allowed to undertake a supportive quantitative easing programme.

Another beneficial aspect for Europe is the continuing weakness in the oil price, which is helpful for a region that is resource deficient.

Possible threats to this rosy scenario are similar to those faced elsewhere: unforeseen economic slowdown, China mishap and geopolitical escalation.

Philalithis, Eugene_700x450Eugene Philalithis is portfolio manager of the Fidelity Multi Asset Income Fund

Overall, my outlook for the European economy is positive in 2016. Growth should be supported in the year ahead by loose monetary policy from the ECB, weak inflation and the potential for stronger business investment off the back of increased lending. Indeed, the ECB is poised to loosen monetary policy further in March, having eased as recently as December.

I am mildly positive on European equities, with the recent sell-off having provided an opportunity to buy back in at more attractive levels. There are also opportunities with European high-yield bonds and loan vehicles, which can offer attractive yields and better downside protection than equities in the event of a more protracted economic picture. However, the relative merits of these asset classes are less when compared with opportunities within equivalent US asset classes. In addition, the recent sell-off in European banking has generated some interesting opportunities, particularly with bank debt at current valuations.

However, the outlook is clouded somewhat by the threat of political risk, with tensions between EU member states over the handling of the migrant crisis. In this context, the UK’s referendum on EU membership could make these issues harder to deal with, with a leave vote undermining the union at a crucial time and the renegotiation possibly encouraging member states to seek their own exemptions to European rules.

Fletcher, Jamie_700x450Jamie Fletcher is deputy fund manager for fund of funds at Sarasin & Partners.

In June, the UK will vote on whether to leave the European Union – adding yet more uncertainty to an already changeable investment community.

The first question is, how will people vote? We learnt last May how difficult a question this is to answer; even asking people what they are going to do is not an accurate way of knowing what they will do. Drawing on behavioural psychology, one cannot help but think of status quo bias – where decisions are made to avoid the unknown – although this is not exactly a solid foundation upon which to build an investment case.

The second question is, what would a Brexit mean for the UK and Europe? With so many variables and theoretical outcomes, it is difficult to have conviction in an assessment of relative upside and downside risk. However, it does seem most people agree that a Brexit would be some variation of “bad” for the UK and “less bad” for Europe.

Making a decision on an unknowable event leading to uncertain circumstances seems quite low down on the investment/gambling scale, which means we will be avoiding any active risk exposure to the UK. We do, however, think it is a safe bet that this uncertainty will lead to European markets being volatile in the short term. This can offer opportunity to managers with a focus on valuation, looking for attractive entry points, such as JB Euroland Value.