Europe has been dominating the headlines recently – for a variety of reasons. So far as the general public is concerned, the negotiations over the terms in which the UK remains a member of the European Union and the forthcoming in/out referendum share priority with the ever growing immigrant crisis as the dominant issues. For investors, it is more the consequences of a “Brexit” that is holding their attention, along with the seemingly endless plight of the eurozone economy.
With the referendum not due until June, the uncertainty this engenders will remain with us in the short term, though it is more the effect it is having on the domestic stock market and sterling that is causing concern. The fragile nature of the economic recovery in Europe has been brought into focus by the decision of the European Central Bank to introduce negative interest rates and extend its quantitative easing policies. This unconventional approach to monetary policy has yet to produce noticeable results.
“We have seen anti-austerity governments take control in a number of countries although their ability to adopt policies at odds with the central bank is questionable”
An increase in the negative interest rate applied to commercial bank deposits and a reduction to zero in its main interest rate – admittedly from a paltry 0.05 per cent – underlines the problems facing the economies in the single currency zone. The central bank has itself reduced its forecasts for economic growth among the member states, with a modest 1.4 per cent expected this year and just 1.7 per cent in 2017. The bond-buying programme, or QE if you prefer, will now continue until at least March next year.
Such action might be considered alarmist, but it is worth remembering the absence of moves in monetary policy at the beginning of the year disappointed investors. Even so, these recent moves caught markets by surprise and saw the euro fluctuate widely. It all creates a background of uncertainty for investment managers, which goes some way to explaining why the tables of the best performers include few names that were present when I last reviewed the sector some two years ago.
The migrant crisis also has an effect on investor perception of likely outcomes. At the very least it is adding an unwelcome cost burden to economies already hard pressed by austerity policies. At the worst it could see social unrest developing and political upheaval.
Already we have seen anti-austerity governments take control in a number of countries although their ability to adopt policies at odds with the central bank and the stron-ger member states is questionable.
More of a concern is the influence all this could have on otherwise apparently stable economies, such as Germany, which until now has been immigrant-friendly, but is seeing a public backlash against an open-door policy. And, of course, it is already influencing the approach of a number of governments, undermining the Schengen open border agreement, and will probably have an effect on the outcome of the UK’s own referendum.
This is a background that makes it difficult to see quite where markets may travel in the future. Certainly, performance among European funds has been more muted of late. Two years ago the top-performing fund over six months returned 22.6 per cent and over five years rose nearly two and-a-half times.
The more recent performance figures show rises of 13.5 per cent and 81 per cent respectively. Moreover, average fund performance is also lower, with the short-term tables at close to zero, or even negative, and a modest 30 per cent gain over five years compared with a more than doubling of the average fund two years ago.
The runners and riders have changed too. The undisputed champion is Man GLG, where the Continental European Growth fund tops the tables over all four periods reviewed. Two years ago it did not feature in the top five at all. In contrast, Neptune European Opportunities, which did feature two years ago, trails the pack over all the periods reviewed. It has been a tough time for the managers of European funds.
Perhaps some congratulations are due to Scottish Widows, which has succeeded in ret-aining a place in the tables since 2014. However, it is clear managers by and large find this sector tricky at present – unsurprisingly. The outlook is further clouded by the recent strength of the euro, which probably owes more to the unwinding of loan positions in the wake of unsettled markets. With China – an important market for many European countries – slowing down, positioning portfolios within Continental Europe is likely to prove testing.