The Briefing: Europe

Europe is an intriguing region. Despite being packed full of international corporate giants, it has been struggling to entice UK investors who find it difficult to see past the troubled economic backdrop of many European nations.

As a result, UK investors have only committed £40 billion to this sector and it accounts for a relatively modest 4.5% of total funds under management. This compares to the £159 billion that has been invested in UK All Companies, a figure equating to an 18% share.

The latest wave of uncertainty over Europe, which is being caused by the prospect of more economies faltering and the suggestion that stocks are no longer so attractively priced, is being blamed for the most recent exodus.

To find out more about the standout performer in the IMA Europe excluding UK sector over the past three years, click here.

A whopping £48 million was withdrawn from European funds during July - compared to the £678 million net inflows into the UK and £203 million into Asia, according to the most recent fund statistics compiled by the Investment Management Association (IMA).

Quantitative Easing

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

However, it is the economic weakness that many hope will force the European Central Bank into full scale Quantitative Easing (QE), according to Damien Fahy, founder of Moneytothemasses.com, who points out you only need to look at the UK, US and Japan to see what that might mean for stocks.

"European exposure is essentially a bet on QE in Europe," he says. "There's nothing wrong with that but be mindful of the possible downsides. The bumpy ride could come from a number of places such as geopolitical tension in Ukraine, France's faltering economy or maybe even another banking crisis."

Geoff Penrice, a charted financial planner at Astute Financial Management, agrees it's a mixed picture at present. "The eurozone continues to show signs of mild healing, however unemployment remains high and credit conditions remain tight as banks continue to repair their balance sheets in preparation for stress tests later in the year," he says.

The economic backdrop has certainly been poor for a number of years, concedes Mark Dampier, head of research at Hargreaves Lansdown, with the peripheral nations struggling with issues such as debt, unemployment and uncompetitive economies. However, he suggests looking a bit deeper.

"It is important to disconnect economic prospects from stockmarket prospects because, despite the poor economic outlook, Europe is home to many successful businesses with global earnings," he says. "Investors prepared to take a long-term view when things seemed at their worst have been rewarded."

Decent returns

It's a fair point. Despite the anxieties, investors who put their faith into European funds would have made decent returns over the past few years. In fact, the IMA Europe excluding UK sector has delivered 52.17% over the past three years, according to Morningstar data to 7 September 2014.

This means it has outperformed sectors such as IMA China/Greater China (23.14%), IMA Asia Pacific excluding Japan (25.6%) and IMA Property (26.88%). It was, however, narrowly beaten by IMA UK All Companies (53.4%) but was a long way behind IMA North America (67%).

Many European companies are performing well, making profits and have large amounts of cash on their balance sheets"Patrick Connolly

The longer-term figures are even better with the IMA European Smaller Companies sector only being beaten by IMA China/Greater China (245%), IMA Global Emerging Markets (234%) and IMA Asia Pacific excluding Japan (227%) over the past 10 years to the same date.

Patrick Connolly, a chartered financial planner at Chase de Vere, is not surprised. There are, he suggests, many good quality companies listed in Europe that have strong growth prospects over the medium to long term, which makes them attractive to hold in client portfolios.

"Despite the negative sentiment which has surrounded the eurozone in recent years, it doesn't change the fact that many European companies are performing well, making profits and have large amounts of cash on their balance sheets," he says.

"Strong growth prospects"

In fact, he believes it should be part of most portfolios. "Europe is an incredibly important part of the global economy and hosts many good quality companies with strong growth prospects," he explains. "Virtually all investment portfolios should have at least some exposure to Europe."

The European Central Bank (ECB) is helping to appease markets by adopting accommodative monetary policies and stating that it will do whatever is necessary to support European economies, he points out. However, he's not getting ahead of himself.

"It would be foolhardy to assume that the problems in the eurozone have all been resolved," he adds. "There is still a long way to go and it's dangerous to predict with confidence that everything will continue to improve from here, despite the better efforts of the ECB." Even so, experienced fund managers remain upbeat. Richard Woolnough, who runs the M&G Optimal Income Fund, acknowledges that Europe is "in a funk" over deflation and the weak economy but says it has been this fragile before.

"I do not believe that things are going to be as bad as people expect," he says. "When markets are expecting really bad news, if you don’t think it will be as bad as that, you take a contrarian view, which is what we have done."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.