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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.

Kate Marshall - Senior Investment Analyst
30 July 2020

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 of course 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’s 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 slipping 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 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 potential

See the Wealth Shortlist

The coronavirus crisis has brought unprecedented challenges to economies around the world, and volatility to global stock markets, including Europe. While China was the first economy going into the pandemic, Europe quickly became the next epicentre of the virus as death tolls in countries such as Italy and Spain grew quickly.

So far this year, to the end of June 2020, the FTSE World Europe ex UK Index has fallen 1.9%. Share prices fell heavily in February and March, as the Covid-19 outbreak took hold, created mass uncertainty and pushed investor sentiment into a downward spiral. Most stock markets have since recovered to some extent, as major global governments and central banks stepped in with extensive fiscal packages to support domestic demand and economic activity. But the impact on markets varies from country to country, depending on the extent of the policies put in place and the rates of infection. Past performance isn't a guide to future returns.

Some northern European countries have fared slightly better against the crisis, and Denmark is one of the top-performing European stock markets. So far this year it's grown 18.3%. Other major European economies, including Spain, Italy and France haven't done so well and have faced much higher death tolls. Their markets have lost 16.6%, 10.7% and 9.0%, respectively.

Eastern Europe makes up a smaller part of the European stock market, but it has been noticeably weak. Especially as Russia has the fourth highest number of recorded coronavirus cases in the world at time of writing. As a huge exporter of natural resources, a volatile oil price earlier in the year also hasn't helped Russia's case. Its stock market has fallen 20.2% so far this year.

European markets - performance year-to-date

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2020.

Broadly speaking, European smaller companies have underperformed larger firms over this time. Smaller businesses don't tend to hold up as well as larger and more stable firms when market conditions are weaker, and that's what we've seen this year.

Going forward, and in the near term, stock markets are likely to remain sensitive to daily news flow about the virus. Even though we have seen some stability in markets more recently, investors will likely want to see more confidence that different economies are approaching a peak in virus cases. Or that we continue to see backing from major global governments and central banks to support domestic demand and economic activity.

Over the longer term we think Europe has stored up potential. Some of the world's most successful companies are based there, and some carry out businesses worldwide, so they provide exposure to global markets, including faster-growing economies. As Europe has done so in the past, we think many companies will come back fighting fit and could deliver healthy returns. There are no guarantees though.

Annual percentage growth
Jun 15 -
Jun 16
Jun 16 -
Jun 17
Jun 17 -
Jun 18
Jun 18 -
Jun 19
Jun 19 -
Jun 20
IA Europe ex UK 4.7% 29.3% 3.1% 3.1% 1.1%
IA European Smaller Companies 10.0% 34.5% 10.0% -2.7% -0.4%

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2020.

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.

Five year performance

  • IA Europe ex UK

    +45.4%

  • IA European Smaller Companies

    +57.6%

Data correct as at 30/06/2020. Please remember past performance is not a guide to future returns.

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 you should be comfortable deciding if a fund fits your investments goals and attitude to risk. For investors who don’t, we offer ready-made solutions which are aligned to broad investment objectives and those who want extra help 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 any income from them can fall as well as rise in value so you could get back less that you invest.

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 30 June 2020.

Wealth Shortlist fund reviews

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. Overall 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 and research analyst Roland Grender.

Pease has used the same investment process for many years. In particular he likes businesses that do something unique and offer a product or service that other businesses struggle to replicate or do better. This has led to an enviable long-term track record, though the fund won't perform well all the time and past performance isn’t a guide to future returns.

This fund mainly invests in big firms in larger or more stable European economies, such as Switzerland, France, Germany and the Netherlands. The fund invests in a relatively small number of companies which is a higher-risk approach. We view it as a good all-round choice in this sector, either as a first European fund, or to sit alongside other European funds using different investment styles. It could also form part of a broader global investment portfolio focused on long-term growth.

David Dudding, the fund's manager, has a wide-reaching knowledge of European markets. He started his career at Threadneedle running a European smaller companies fund, and has managed the European Select fund since 2008. Benjamin Moore has been co-manager since April 2019 and they're also supported by a well-resourced European equities team.

The team looks for quality companies with a sustainable competitive advantage – a unique quality that could help the business maintain higher earnings. A more conservative investment approach and 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.

This fund aims to boost long-term growth by focusing on 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. A focus on smaller businesses increases risk and makes a longer investment horizon essential.

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. If the managers get their forecasts right and this potential is later recognised by more investors, the share price could rise though of course there are no guarantees.

This fund aims to track the performance of the broader European stock market, as measured by the FTSE World 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 convenient way to access companies across the continent, and could be used as a way to diversify a long-term, global investment portfolio.

Latest research updates

Jupiter European Special Situations – change of manager

Jupiter European Special Situations – change of manager

Thu 11 June 2020

Cédric de Fonclare stepped down as manager of the Jupiter European Special Situations Fund on 1 June 2020. Mark Nichols and Mark Heslop have taken over the fund's management.

Invesco Head of European Equities to retire at end of 2020

Invesco Head of European Equities to retire at end of 2020

Wed 10 June 2020

Invesco has announced succession planning for Jeff Taylor, Head of European Equities, who has decided to retire at the end of 2020.

Legal & General European Index: May 2020 fund update

Legal & General European Index: May 2020 fund update

Mon 11 May 2020

In this newly enhanced fund update, Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the Legal & General European Index Fund.

Barings Europe Select: April 2020 fund update

Barings Europe Select: April 2020 fund update

Thu 30 April 2020

In this newly enhanced 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: April 2020 fund update

Threadneedle European Select: April 2020 fund update

Wed 29 April 2020

In this newly enhanced fund update, 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.

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