Is there opportunity for investors in Europe?

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.

This article isn’t a recommendation to invest. If you’re not sure if an investment is right for you, ask for financial advice. All investments rise and fall in value so you could get back less than you invest.

The outlook for Europe

Covid-19 still presents a huge challenge for global economies, but vaccination rates in the EU have picked up after a slow start.

There are also political changes in Europe, with German Chancellor Angela Merkel stepping down later in 2021. Brexit trade tensions also simmer beneath the surface, as well as geopolitical issues between the major democracies of the world and China and Russia.

All of these factors could dampen the outlook for European shares.

On the other hand, the European Central Bank (ECB) has increased its efforts to help support the economy in these challenging times. European shares as a whole also look better value than lots of other markets around the world, especially when compared to the US.

There are also some other strong tailwinds, including the €750 billion EU pandemic recovery fund. The EU’s committed to long-term environmental spending, in the form of the EU Green Deal. These initiatives have since prompted interest in the long-term prospects for a range of European companies in renewable energy and infrastructure.

Some economic data gives grounds for hope that a recovery is now underway in Europe. Sentiment about the economy has also jumped recently, reflecting improving expectations. European shares have been relatively unloved in recent years from an investor’s perspective and have played second fiddle to the US in particular. There are some tentative signs that this could be changing.

How does Europe shape up against the rest of the world?

There are lots of European companies that are well known and established world leaders in their sectors.

Compared with the broader global market, Europe is well represented in consumer defensives – companies that are capable of making money come rain or shine. On the other side, it has less in technology.

This mix of sectors gives the European market different characteristics from other stock markets around the world. It’s one of the reasons why the European market has lagged other regions which are better represented with high-growth sectors like technology, which have performed well over the ten years to 31 July.

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/07/2021.

While Europe has underperformed the wider global stock market over the last ten years, some are wondering whether the tables could be turning.

Some of the currently very strongly performing sectors, like technology, are less well represented in Europe. Should investor sentiment improve towards sectors linked to the health of the economy, like banks and industrials, then European shares could be well placed to benefit.

Does Europe have an edge?

The Investment Association Europe excluding UK peer group has tended to outperform the FTSE World Europe ex UK index over the longer term*. This means that European shares is an area where fund managers have outperformed the index, which hasn’t historically been the case in all regional markets.

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/07/2021.

This could be because some European companies aren’t as well known, especially the smaller ones which can give active fund managers an edge.

There’s a wealth of choice and opportunity in Europe for fund managers to utilise. We would expect a good manager to have a good chance of outperforming over the longer term, although nothing is guaranteed.

European investment ideas

Europe offers something different to the rest of world. It’s a region with lots of different stock markets, types of companies and different sectors. This diversity could offer opportunity for investors.

We think there are also good fund managers, who invest in European companies, able to take advantage of the wide range of available investment opportunities. The following fund ideas could be a good starting point for investors looking to invest in Europe as part of a diversified portfolio.

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

Threadneedle European Select

The managers look for companies with long-term growth potential to invest in at the right price. These companies have tended to be slightly more expensive than peers. However, they could be able to deliver higher and more sustainable cash flows and earnings over the longer-term.

The fund invests more in technology, but has less in financials than peers. The focus here is not banks, whose earnings can be quite up and down as they’re more dependent on how well the economy is doing. Instead they like insurers like Tryg, or fund platforms like Allfunds which dance to their own tune.

With a focus on seeking out companies that are more dependable, it might be surprising that the fund has more in the cyclical basic materials sector. However, these holdings aren’t miners but speciality chemicals companies like Brenntag and Sika. They have a wide variety of end user markets such as agriculture, cosmetics, construction and renewable energy.

This fund could be a good starting point for a portfolio looking to invest more in larger European companies.

Investors should be aware that the fund invests in a fairly small number of companies. This means each one could have a big impact on performance, though this approach increases risk.

More On Threadneedle European Select, including charges

Key Investor Information

TM CRUX European Special Situations

The team specialise in looking at companies of all sizes, but will often invest more in smaller companies than peers. This focus could boost growth because these companies are at an earlier stage of their development, but that also makes them higher-risk which adds to the risk for this fund. The fund also invests in a relatively small number of companies which increases risk. There’s a focus on looking for overlooked, good-quality companies which have the opportunity to post good returns.

The fund managers have found interesting opportunities in the very varied industrials sector. Europe’s well known for its extensive industrial base and currently around a quarter of the fund is in industrials, which is more than its peers.

The breadth of ideas varies from French electrical engineering company SPIE, Swiss SGS in certification and testing and French Schneider in energy management.

The fund is well represented in the bell weather industrials sector and in the main countries of Europe like France, Switzerland, Germany and the Netherlands. Given the focus on companies of all sizes, this fund could sit alongside a more broad based European fund.

More on CRUX European Special Situations, including charges

Key Investor Information

Barings Europe Select Trust

The fund has a focus on smaller companies which are often not well known to the wider investment community. This is because there are a lot of them, and there are less investors looking at them. This means that the fund managers will often need to do a lot of leg work to find good opportunities. Investing in smaller, less established companies also adds risk.

The team has an eye to companies they believe to be potential bargains which, if they’re right, can help boost returns. They favour companies with good or improving and more predictable returns. Overall, this focus on more dependable companies is a less risky way to invest in smaller companies, which can be very volatile.

The fund has more invested in financials and industrials. The holdings within financials are extremely diversified through companies such as stock exchanges, banks and insurers. The team manage a portfolio of around 100 companies which helps diversify the fund and spread risk.

We think this fund could offer good returns. However because it’s invested mostly in smaller companies, it is higher risk. The fund could fit in to a portfolio with a more conservative European fund alongside it.

More on Barings Europe Select, including charges

Key Investor Information

Legal & General European Index

Despite the general success that active managers have historically had in Europe, funds that closely track indices can have a role to play in portfolios. These offer cost effective access to a wide range of typically larger companies in Europe.

The index is broadly spread at the sector level with weightings above 10% in consumer cyclicals, financials services, industrials, technology, consumer defensives and healthcare. France, Switzerland, Germany and the Netherlands are the main countries, but Sweden, Spain, Denmark and Italy also feature. Larger positions in the fund include food and drinks giant Nestle, semiconductor specialist ASML, healthcare company Roche and luxury goods company LVMH.

This fund offers investors a way to invest in European shares, without having to decide upon a particular manager or investment style. Alongside other funds, it could help form the core of a portfolio looking to invest in Europe.

More on Legal & General European Index, including charges

Key Investor Information

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