We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us
Europe

European sector

The economic backdrop has been poor in Europe for a number of years, yet the continent is home to many successful businesses.
picture of Josef Licsauer

Josef Licsauer - Investment Analyst
16 December 2021

Europe is more than just a single continent. It’s politically, economically and culturally diverse. From Norway and Sweden in Northern Europe to Spain and Italy in the South, each area has its own struggles and success stories. We think this diversity offers opportunities for investors.

Europe’s had its fair share of problems in recent years, but there are reasons to be positive. It's home to lots of first-class businesses that have made money from across the globe. This means they have the chance to be successful, no matter what’s going on in the economic or political background although there are no guarantees.

There are also lots of quality fund managers investing in Europe with great track records. Most focus on larger companies. Some invest in small and medium-sized companies. These offer greater growth potential, but they’re higher risk than larger firms.

Most European funds aim to grow your investment, but there’s an increasing number of funds that focus on dividend-paying companies in order to pay investors a regular income.

Our View

Europe has overcome a lot of problems in recent years. But it’s not out of the woods just yet. Debt levels for both governments and individuals are high, some Eurozone banks have been on the brink of failing, and some countries have been close to or have slipped into recession. Many European nations have also been hit hard by the economic restrictions associated with coronavirus.

We generally think investors should try to ignore economic news and focus on the prospects for individual companies. In the short term, changes in the economy and investor sentiment can affect how the stock market performs. But over the long run share prices are more driven by how successful businesses are and their earnings growth. Trying to time markets or second guess the effect of economic news has had little impact on investment success over the long term.

We think most long-term growth portfolios should have at least some exposure to Europe. It means investing in some of the world’s most successful companies. Some of these carry out business worldwide, so they provide exposure to global markets, including faster-growing economies.

There are a number of successful managers in this sector and the Wealth Shortlist features those chosen by our analysts for their long-term performance potential.

Remember all investments can fall as well as rise in value and you may not get back what you invest.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term performance potential

See the Wealth Shortlist

Like most major global stock markets, the European stock market fell sharply in March 2020, amid the first wave of coronavirus. Later in the year, a combination of easing restrictions, improved vaccination rates and the hope of economies opening helped drive recovery.

Over the last 12 months, the market climbed 15.75%. It hasn’t all been plain sailing though. European markets experienced pressure from renewed rising Covid cases, worries around an energy crisis and more recently, new restrictions. Past performance isn’t a guide to the future.

Some countries have been more resilient than others. The Netherlands returned an impressive 35% over the past year. Disruptions in supply chains and shortages in certain electronic components meant the Dutch based semiconductor manufacturer ASML flourished. The Nordic markets weren’t far behind either. Norway and Sweden performed well, climbing 26.40% and 19.40%, respectively.

Spain was the poorest performing market over this period. The country was hit hard following sudden electricity price spikes. Poor accessibility to international energy grids and a reliance on others for energy supplies, including natural gas from North Africa, meant Spain was impacted more than others.

Germany struggled this year too, as tightening restrictions and supply bottlenecks hindered the economy. Inflation has also reached 6%, its highest in decades. The European Central Bank believes this is temporary and inflation will drop to more normal levels once supply issues and restrictions ease.

Chart showing performance of European markets

Scroll across to see the full chart.

Past performance is not a guide to future returns. Source: *Lipper IM to 30/11/2021.

Sectors linked closely to the health and state of the economy did well in the first half of the year, including banks and industrials. Looking at the second half of the year technology and healthcare took the spotlight.

Chart showing performance of European sectors

Scroll across to see the full chart.

Past performance is not a guide to future returns. Source: Lipper IM to 30/11/2021.

At the beginning of the year, some investors preferred companies that had previously gone overlooked and traded at lower valuations, also known as ‘value’ stocks. The discovery of an effective vaccine boosted this rally. Companies expected to grow their earnings and cash flows significantly in future, otherwise known as growth stocks, took a hit.

Growth stocks have crept back into favour though and outperformed value stocks over the year. Sectors including technology and consumer goods have benefitted from this. That said, inflation and the expectation of rising interest rates, which can dampen the prospects of growth companies, have picked up as well. It’s still too early to tell if this is a longer-term trend. Either way, it’s a reminder of the benefits of having a diversified portfolio.

Outlook for 2022

The arrival of Europe’s fourth wave of the coronavirus has led to some countries re-introducing lockdown restrictions. Naturally, this will delay recovery efforts and slow growth going into 2022, but these restrictions may not last as long as previous ones.

We’ll also see large injections of funding into Europe over the coming years – a budget totalling €1.1 trillion and a next generation fund of €750 billion which will aid in recovery efforts and finance the European Green Deal. This is positive for Europe’s future but could put further strain on their already high levels of debt.

Inflation worries may also have an impact going forward. In recent months, Eurozone inflation was driven to its highest level in almost 13 years. The European Central Bank believes this is temporary and inflation will drop to more normal levels once supply issues and restrictions ease. Either way, it will put strain on economies across Europe in the short term.

The economy is forecast to expand by 4.3% in 2022 and European companies are in relatively good shape. There could be some interesting opportunities for investors. Nothing is guaranteed though and a long-term view is needed.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist to build your portfolio or review your existing portfolio, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want extra help, you can also ask us for financial advice.

The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments and the income they produce can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds on the HL platform. It is a maximum of 0.45% a year - view our charges. Comments are correct as at November 2021.

Wealth Shortlist fund reviews

This fund aims to boost long-term growth by focusing on higher risk small and medium-sized European companies. This makes it different to most other European funds that focus on larger firms. It could therefore diversify the European part of an investment portfolio, or a broader global portfolio focused on growth.

There aren’t many fund managers with such a long and successful track record of investing in this less familiar part of the European stock market. Nick Williams is one of the few. He also has the support of co-managers Rosie Simmonds, Colin Riddles and William Cuss.

Williams has used the same disciplined investment process for many years. He and his team follow a GARP (Growth at a Reasonable Price) philosophy. This means they look for companies that grow their earnings consistently, but whose shares can be bought at a lower price than the earnings potential suggests they should be.

The fund has returned 15.15% over the last 12 months. Though this is a good return it’s lagged the average fund in the European Smaller Companies peer group. Our analysis shows that investments in financials and industrials detracted on performance over this period. Past performance is not a guide to future returns.

That said, we continue to like his disciplined investment approach and the strength of his stock picking ability over the long term. He’s added value no matter what size of company he invests in, and regardless of what sector they're in or country they're based.

This fund aims to track the performance of the broader European stock market, as measured by the FTSE World Europe ex UK Index. It's currently made up of around 500 companies, focused towards sectors such as financials, consumer goods, healthcare, and industrial firms.

While these companies are based in European countries, many of the market's largest firms sell their products and services across the globe, so they're not solely reliant on their domestic economies to be successful.

The fund invests across Europe, including Switzerland, France, Germany, Sweden, Spain and Italy. We think it’s a good option for a low-cost, convenient way to access companies across the continent. It could also be used to diversify a long-term, global investment portfolio.

This fund mainly invests in big firms in larger or more stable European economies, such as Switzerland, France, Germany and the Netherlands. We think it could be a good choice for exposure to Europe within a global investment portfolio or sit alongside other European funds using different investment styles. The fund invests in a fairly small number of companies and this means each one could have a big impact on performance, though this approach increases risk.

The managers look for high-quality companies they believe offer sustainable returns and strong growth potential over the long run. These businesses typically possess unique qualities and a competitive advantage that others struggle to replicate. A focus on companies that could deliver more sustainable returns has seen the fund hold up better than the average European fund in weaker markets, though it hasn’t tended to rise as quickly in positive markets. Please remember past performance isn't a guide to future returns.

The fund has performed well over the past 12 months, despite a shaky start to the year. The fund’s lack of exposure to some of the lowlier valued and more economically sensitive areas of the market, such as energy and banks, meant it struggled in the beginning of the year. As larger, quality growth companies fell back into favour, the fund’s performance picked up. We continue to believe the fund is a good choice for mainstream European equity investment.

This fund aims to grow investors' wealth over the long term by investing in European companies of all sizes. This includes large, medium-sized and smaller businesses. The latter could boost growth because these companies are at an earlier stage of their development, but that also makes them higher-risk. The fact the fund invests in a relatively small number of companies is a higher-risk approach. We think it could be used as a way to diversify the European part of an investment portfolio, or a broader global portfolio focused on long-term growth.

Richard Pease is a fund manager we've rated highly for many years. He's invested in European companies for more than three decades and built impressive knowledge of the market over this time. He also has a team of investors around him, including co-manager James Milne.

Pease uses the same investment process that's been in place since he started his investing career. The companies he invests in should generate strong cash flows, recurring revenues, and have little or no debt. He likes businesses that do something unique and offer a product or service that other businesses struggle to replicate or do better. They should also be run by a management team with a proven track record of running a successful business.

This has led to an enviable long-term track record, though the fund won't perform well all the time. For example, it’s performance has been a little lacklustre over the past year. Growth and value stocks have performed well at different times over this period however the fund doesn’t focus solely on either these types of company. Rather it’s focus is on underappreciated growth or unique companies.

Charges are taken from capital which can increase income but reduces any capital returns.

Latest research updates

Legal & General European Index: December 2021 fund update

Legal & General European Index: December 2021 fund update

Fri 24 December 2021

In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, cost and performance of the Legal & General European Index Fund.

Threadneedle European Select: November 2021 update

Threadneedle European Select: November 2021 update

Wed 24 November 2021

In this fund update, Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, cost and performance of the Threadneedle European Select Fund.

TM CRUX European Special Situations: September 2021 update

TM CRUX European Special Situations: September 2021 update

Wed 22 September 2021

Senior Investment Analyst David Holder shares our analysis on the manager, process, culture, cost and performance of TM CRUX European Special Situations.

Barings Europe Select: February 2021 fund update

Barings Europe Select: February 2021 fund update

Mon 15 February 2021

In this fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the Barings Europe Select fund.

Threadneedle European Select: December 2020 fund update

Threadneedle European Select: December 2020 fund update

Mon 14 December 2020

In this fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the Threadneedle European Select Fund.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

Fund research

Our expert research team provide regular updates on a wide range of funds.

See fund updates