European shares are currently at bargain basement prices. But Cherry Reynard says you need a good fund manager to bag the best deals in: Is it time to invest in Europe?
The Briefing: Europe
Enthusiastic investors ploughed £190 million into the IMA Europe excluding UK sector and almost £88 million into IMA European Smaller Companies during August, making Europe the third best-selling region, according to data compiled by the Investment Management Association.
And it's fair to say that investors who put their faith in Europe have been rewarded over the past year, with statistics from Morningstar revealing that only two sectors - IMA Japan and IMA UK Smaller Companies - have delivered better returns.
The average IMA European Smaller Companies fund rose 28.45% in the 12 months to 2 October 2013, while the average fund in the IMA European excluding UK sector went up 26.15% over the same period, according to the data.
When you also factor in that Europe has recently managed to drag itself out of recession after 18 diabolical months in the mire, there is clearly cause for optimism, suggested Julian Chillingworth, chief investment officer of Rathbones.
Quick guide: Is this the right sector for me?
Consider investing in this sector if…
- You are confident European companies will continue performing strongly.
- You believe European economies will grow.
- You are looking to diversify an existing portfolio.
He said: "The past few years have been very difficult for European economies but it looks as if the economic trends are improving.
"The US is also expected to post reasonable growth, so demand for European goods and services should increase."
However, even if the economic backdrop weakens over the next couple of years, that doesn't automatically mean individual funds will be adversely affected because many of the stocks in which they invest are international giants and less reliant on domestic demand.
John Bennett, director of European Equities at Henderson Global Investors, insisted there's a huge difference between European stockmarkets and European economies.
"It's becoming almost archaic to talk about European equities," he argued.
"It's a bunch of businesses that happen to have been born - and have a stockmarket listing - in Europe, but which are global businesses."
European stocks on cheap valuations
Patrick Connolly, a certified financial planner with Chase de Vere, believes European stocks are on relatively cheap valuations - certainly in comparison with US equities.
"Many European companies are performing well, making profits and have large amounts of cash on their balance sheets," he said.
"Good quality active fund managers have shown they can outperform in Europe and this is likely to continue as stockpicking managers exploit inefficiencies in markets," he added.
Unfortunately, some will be more successful than others depending on their abilities to pick the right stocks and whether their investment philosophy - such as a value or growth bias - is likely to work in the current environment.
A look at the performance data illustrates the point. While the best funds in the IMA Europe excluding UK sector have shot up by around 50% over the past three years, those at the other end of the table have enjoyed far more modest gains of about 13%.
It's a similar story in the IMA European Smaller Companies sector, with the best enjoying a 60% return since 2010 and the worst delivering less than 20%.
Taking one of the main economic powerhouses completely out of your portfolio would be a pretty big bet to make.
The key, as always, is to understand the manager's approach and see if this chimes with your view of markets.
"Investors should look for stockpicking fund managers who can adopt a flexible approach, have a consistent long-term track record and good levels of research support," suggested Patrick Connolly at Chase de Vere.
"The fact is that Europe looks pretty good value at present and the risk of a full-scale meltdown appears to have receded, but prospective investors still need to acknowledge there are issues yet to be tackled," warned Geoff Penrice, a chartered financial planner at Astute Financial Management.
"The sovereign debt problems with Italy, Spain, Portugal and Greece have not gone away and because of the high level of unemployment, particularly youth unemployment which is over 50% in Spain, there is the risk of civil unrest."
Optimism is certainly improving if the Bank of America Merrill Lynch Fund Manager Survey for August is to be believed, with a remarkable 88% of European fund managers anticipating the region strengthening over the coming year - twice as many as in the previous month.
The study found respondents increasingly viewed stronger growth as the likeliest solution to the eurozone debt crisis, rather than interventions by the European Central Bank, while the introduction of a European banking union would further improve sentiment.
However, it's still worth having a percentage of your overall assets in European names as part of a diversified portfolio that includes other key developed markets, according to Jason Witcombe, director of Evolve Financial Planning.
"It would be completely illogical not to because it'd be like saying the likes of France and Germany have no relevance," he said.
"Taking one of the main economic powerhouses completely out of your portfolio would be a pretty big bet to make."
Subscribe to Moneywise
Subscribe for just £1 and receive 3 issues
New subscribers take advantage of this fantastic deal with moneyback guarantee if you decide Moneywise is not for you.