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Europe – the unloved giant of trade

Are you ignoring 15% of global markets?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

From the sun-kissed beaches of the Mediterranean, to the snow-capped Swiss Alps, Europe offers a range of fantastic holiday destinations. No wonder it's a popular choice for avid explorers, sun seekers, or those looking for a culinary adventure.

But while lots of us in the UK view Europe as perfect for a getaway, it doesn't tend to be our first port of call when we think about investing. In many ways that’s unsurprising.

A lot of us begin our investing journey by dipping a toe in our home market. For most readers, that's the UK.

Further afield, the US is also popular. After all, it's the world's largest economy and home to some of the best-known and most technologically-advanced companies on the planet.

Following that, you've got the allure of the higher-risk emerging markets, home to fast-growing economies and hard-working, youthful populations.

Europe appears less glamorous. While its economy is expected to grow moderately this year, it's been slowing. As an already-developed economy, the days of rapid growth are likely behind it.

The has-been of yesteryear?

Similar to a number of other developed economies, its demographics aren't great either. Its working age population is likely to diminish over the coming decades, putting pressure on its welfare and healthcare systems, and government spending.

A fractious political backdrop doesn’t help matters. The rise of populist parties, fragile coalitions and minority governments is increasingly the norm.

Europe lags the rest of the world in some specific areas too, like technology. Its tech sector currently makes up about 7% of the broader European stock market, compared with 16% for the global market. Historically, European countries have been more successful at manufacturing hard goods, but arguably this is becoming less relevant.

Germany’s always been known for its car manufacturers, with big names like BMW, Audi and Volkswagen. But recently the automobile industry has been in decline. In future, it could be the software behind cars that becomes the main driver of investor returns, rather than the physical parts. There's a risk Europe gets left behind.

Stock markets by industry (%)

Source: FTSE and Legal & General 30/11/19.

So, what's to love?

First, the variety.

There are around 20 countries in Europe's main stock market – from France and Italy to Sweden and Belgium – and lots have their own language, cultures, laws and political processes.

Navigating these might sound daunting at first, but if anything we view this as a huge source of opportunity, and a chance to uncover opportunities others aren't prepared to find.

European countries make up around 15% of the global market at the moment. It might not sound much compared with almost 60% for the US, but it's much more than markets like the UK (5%), Japan (9%) and the emerging markets (6%).

There's much more to Europe than meets the eye, and its size means we think most long-term investors should consider it for their portfolios.

Not only that, Europe offers exposure to areas that aren't as well-represented in other markets. While the US is dominated by tech firms, and the UK is full of financial and mining companies, Europe’s a leader in areas like consumer and luxury goods, pharmaceuticals and medicines, engineering and industrials.

Trendy in trade

Lots of European companies also export their goods, and do business across the globe.

On average, companies make more than 50% of their revenues outside of Europe. So they don't only rely on domestic consumers and the health of the European economy to do well.

In fact, Europe’s a huge player on the global trading scene. It's the world's biggest exporter of manufactured goods and services, and the top trading partner for 80 other countries.

Just think of some of the world's biggest multinational consumer companies that are based there: L'Oreal, Nestle, and LVMH, which owns some of the world's most sought-after brands, including Louis Vuitton and Moet champagne. Then there are the major pharmaceutical firms, like Roche, Novartis and Sanofi, which are leading the charge in developing ground-breaking medicines.

America's trade tussle with the rest of the world shouldn't be overlooked here. Europe has been pulled into the fray and this has the potential to negatively impact some exporting sectors, like the Germans’ automobile industry. But not all should be tarred with the same brush.

Europe’s je ne sais quoi

A lot of European companies have proved successful because of their ability to create economic moats – competitive advantages that companies can sustain over the long run.

They might have a unique product that competitors struggle to copy or improve on, or they might make similar goods but at much lower cost.

European management teams also tend to have a longer-term outlook. Companies focused on boosting short-term earnings may end up making rash decisions that prove detrimental to long-term growth.

We tend to like companies that can take a long-term view, since they often end up being the real winners.

Invest in some of the world's best

Negative political and economic news continues to hit headlines and unsettle investors. No doubt there’ll be ongoing periods of volatility, but this can give savvy stock pickers an opportunity to pick up companies at great prices provided investors accept it could be a bumpy ride.

The size and importance of Europe as a global economic region is often underestimated, and it’s easy to forget the rich variety of great companies based on the continent.

Think of it not as investing in Europe’s economies, but investing in European companies – which are some of the best in the world. Remember that all investments fall as well as rise in value so you could get back less than you invest. This article is not personal advice. If you’re unsure, please seek advice.

Looking for investment ideas?

Investing in these funds isn’t right for everyone. You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made. You should understand the specific risks of a fund before investing, and make sure any new investment forms part of a diversified portfolio.

Legal & General European Index

Broad exposure to European markets

This fund provides a simple, low-cost way to invest in a broad range of European companies. It aims to track the performance of the FTSE World Europe ex UK Index, which is made up of around 500 companies from a variety of sectors. Its largest investments include consumer goods company Unilever, healthcare companies Roche and Novartis, and luxury goods business LVMH.

More about Legal & General European Index including charges

Legal & General European Index Key Investor Information

Threadneedle European Select

A focus on large, multinational companies

In this fund David Dudding and Benjamin Moore mainly invest in large European companies, many of which sell their products and services overseas, not only in the countries they’re based. They look for companies they think can grow steadily year after year, with the potential to do well regardless of what’s on in the wider economy. Current investments include cosmetics company L’Oréal, and Amadeus, which is a technology provider for the travel industry. The manager invests in relatively few companies, so each one can potentially have a big impact on performance, both positively and negatively.

More about Threadneedle European Select including charges

Threadneedle European Select Key Investor Information

Barings Europe Select

More domestically focused, small and medium-sized businesses

This fund focuses on small and medium-sized companies, which tend to make more of their profits from their domestic economies than overseas. Smaller businesses often provide niche products and services, and significant growth potential, but they’re higher-risk than larger businesses. Nick Williams, the fund’s manager, aims to invest in companies before their potential is recognised by more investors.

More about Barings Europe Select including charges

Barings Europe Select Key Investor Information

HL Multi-Manager European

Leave the fund choices to a professional

We think this fund offers a helping hand. It invests in what our investment team believe are some of the finest European funds, in a single portfolio. It offers exposure to a range of European countries, companies and fund management styles. As it’s looked after by a team of experts, there are additional charges associated with running a multi-manager fund. The fund’s managed by our sister company, HL Fund Managers.

More about HL Multi-Manager European including charges

HL Multi-Manager European Key Investor Information

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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