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European stock market and funds review – a difficult year ahead?

We look at how Europe’s economy and stock market has fared, where the opportunities could be and how European funds are doing.

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.

The optimism around Europe’s recovery going into 2022 seems to have dissipated. Markets are struggling to digest recent events, including the European Central Bank's (ECB) announcements around interest rates hikes, soaring inflation and the devastating impact from war in Ukraine.

It’s unsurprising GDP, a measure of growth to an economy, is expected to slow through 2022. This has led to some investors starting to steer away from investing in Europe.

But that’s not to say Europe’s a market to avoid. European markets could currently look attractively priced.

Despite a challenging backdrop to the economy, there are some companies and sectors showing signs of resilience and strength, potentially presenting some exciting opportunities for investors. Although nothing is guaranteed.

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

What’s the latest with inflation?

The Eurozone, or the group of countries that use the Euro as their currency, is experiencing uncomfortably high levels of inflation. It rose to 8.1% in May this year. In Europe as a whole, inflation is expected to reach nearly 7% by the end of 2022.

We’ve grown accustomed to low inflation over the years, with some areas never experiencing anything above the target level of 2%. So this could have come as a shock to lots of us.

Inflation has been gradually rising since the early part of 2021, but these elevated levels reflect the recent surge in commodity and energy prices. Supply-side disruptions are also contributing to rising inflation. This will undoubtably cut into people’s incomes and savings, but also firms’ profits.

The ongoing conflict in Ukraine has amplified, and likely prolonged, these issues. Russia’s invasion triggered an immediate humanitarian crisis, but also impacted economies before they had the chance to fully recover from the effects of the pandemic.

The war shows no signs of easing and has exacerbated the supply-demand imbalance. It’s sparked concerns about the distribution of energy, food and how much we can produce of both.

Western sanctions, aimed at cutting Russia from the global financial system, will only add to these pressures due to Russia’s significance as an energy exporter.

One of the challenges Europe faces is replacing these resources from Russia quickly enough to avoid energy rationing across parts of the continent. This would hurt power-intensive industries and slow overall growth to the economies.

What’s the latest on interest rates?

High inflation often prompts central banks to increase interest rates. We’ve seen this globally, not just in Europe. The ECB has committed to raising interest rates by 0.25% in July, the first increase in more than a decade.

Higher rates would imply an increase in the value of Euros or an appreciation of the currency. But after a short spike following the announcement, the Euro fell against some other major currencies including the dollar.

Similarly to the US Federal Reserve (FED) and other central banks, the ECB doesn’t know exactly where inflation will be later this year. But they’ve reduced growth expectations and increased inflation projections, with a potential further hike in September if inflation persists.

This weighed heavily on European markets over the quarter. The fragmented nature of the Eurozone means that different economies are impacted by the rate increases in different ways. For example, Italy, which has a lot of debt in circulation, is seeing yields rising, which can be problematic when repaying debts.

How have European stock markets reacted?

Despite a challenging environment, some countries, like Denmark and Norway, have shown remarkable resilience. They’ve returned 7.76%* and 20.47% over the last 12 months, respectively.

Danish markets have been largely driven by more defensive sectors like healthcare and energy, whereas Norwegian markets have been bolstered by the oil industry’s performance.

Some markets that did notably well in 2021 have fallen quickly so far this year. The Netherlands is one of the markets that has fallen from grace, seeing a drop of 9.15% over the last 12 months. This has been driven by high energy prices and soaring inflation amplified by Russia's war in Ukraine.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2022

Lower GDP growth and the ECB’s interest rate hikes have also reduced the appeal of some companies that did well during the pandemic. Sweden was another market that followed suit, and over the last 12 months has fallen 10.83%.

Annual percentage growth
May 17 -
May 18
May 18 -
May19
May 19 -
May 20
May 20 -
May 21
May 21 -
May 22
FTSE Denmark TR 1.69% 1.97% 29.27% 26.44% 7.76%
FTSE Germany TR 2.48% -6.60% 1.33% 24.93% -11.04%
FTSE Italy TR 8.24% -4.17% -6.09% 33.38% -1.08%
FTSE Netherlands TR 4.31% 1.65% 9.77% 43.54% -9.15%
FTSE Norway TR 23.12% -0.61% -15.80% 38.05% 20.47%
FTSE Sweden TR -4.94% 0.51% 13.44% 43.05% -10.83%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/05/2022

What about different investment styles and sectors?

We’ve seen a sharp rotation away from growth investing, where investors search for businesses they think are likely to grow. They hope to profit as the share price rises in line with improvements in the underlying business. This sometimes means paying a bit more for these perceived long-term strengths.

The prospect of rising interest rates means these expected cashflows, which are often far out into the future, are worth less today.

As a result, this market rotation has paved the way for a value investing resurgence. This is a style that invests in companies that are out of favour and can be undergoing a turnaround or recovery.

Certain value-orientated sectors, like oil & gas and other commodities, have performed well this year. The performance of these sectors has also been driven by the war-related trade and production disruptions.

Other more defensive sectors, like healthcare and pharmaceuticals, were strong over the year too, as they have tended to do well in slowing economies.

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/05/2022

Annual percentage growth
May 17 -
May 18
May 18 -
May19
May 19 -
May 20
May 20 -
May 21
May 21 -
May 22
FTSE Dev Europe ex UK/Food Producers TR -7.50% 32.61% 9.89% 1.73% 10.46%
FTSE Dev Europe ex UK/Health Care TR -7.46% 9.68% 26.74% -1.11% 11.85%
FTSE Dev Europe ex UK/Industrials TR 4.74% -0.47% 0.62% 42.40% -8.33%
FTSE Dev Europe ex UK/Oil & Gas TR 17.33% -3.68% -20.26% 26.28% 29.17%
FTSE Dev Europe ex UK/Pharma & Biotech TR -9.62% 13.20% 28.60% -4.82% 21.26%
FTSE Dev Europe ex UK/Technology TR 12.32% 0.99% 19.91% 32.86% -12.52%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/05/2022

Times like these are a reminder of the importance of having a diversified portfolio. Despite all the disruptions, some European companies are still delivering robust corporate earnings.

As prices rise, it’s likely some demand will fall away. And with inflation being stickier and more persistent than we might have expected, some companies could struggle to protect their margins by passing on costs to consumers.

How have the European Wealth Shortlist funds performed this year?

The last 12 months have been particularly challenging for European markets, though this is a very short timeframe when looking at performance. Past performance isn’t a guide to the future and investments should be held as part of a diversified portfolio for the long term. By long term, we mean at least five years.

Investing in these 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.

Here’s how some of our Wealth Shortlist funds in these sectors have done. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

TM CRUX European Special Situations fell 6.10%* over the last 12 months. This is better than the other European funds on the Wealth Shortlist but is still a greater fall than its IA Europe Excluding UK peer group average.

The fund was relatively stable towards the end of 2021, buoyed by the strength of its investments in financials. However, it struggled going into 2022, partially due to the impacts of the conflict in the Ukraine. But also due to the performance of some of the fund’s investments in the technology and basic material sector.

TM CRUX European Special Situations has no distinct growth or value style bias, so it’s managed to limit its fall compared to growth focused funds. Equally, it hasn’t managed to capture the upside that some value orientated funds have experienced.

More about TM CRUX European Special Situations, including charges

TM CRUX European Special Situations Key investor information

Barings Europe Select Trust was the worst performing fund in the European sector of the Wealth Shortlist over the last year. The fund focuses on investing in higher-risk smaller European companies and over the last 12 months, these companies have significantly underperformed their larger peers.

The fund fell 11.91% compared to the average return of the IA European Smaller Companies return of -10.19%. The main detractors from performance over this period included investments in the industrial and healthcare sector.

More about Barings Europe Select Trust, including charges

Barings Europe Select Trust key investor information

Annual percentage growth
May 17 -
May 18
May 18 -
May19
May 19 -
May 20
May 20 -
May 21
May 21 -
May 22
Barings Europe Select Trust 6.06% -1.76% 3.60% 30.15% -11.91%
IA European Smaller Companies TR 8.17% -7.77% 1.83% 40.03% -10.19%
TM CRUX European Special Situations 2.61% -5.24% 0.07% 20.95% -6.10%
IA Europe Excluding UK TR 2.48% -3.25% 3.08% 27.27% -3.44%

Past performance isn’t a guide to future returns. Source: *Lipper IM, to 31/05/2022

How have other European funds fared?

Baillie Gifford European and L&G Future World Sustainable European Equity Focus were the two worst performing funds in the IA Europe ex UK sector over the last year, falling 27.53% and 22.69% respectively. Baillie Gifford European’s growth style of investing has been out of favour which has held back the fund’s performance.

It’s a similar story for the L&G Future World Sustainable European Equity Focus fund. The managers look for companies they believe have the potential for exceptional growth over the long term.

Inflation can also be harmful for companies expected to grow a lot in the future, as the present value of their future profits are worth less today. This has held back the fund’s performance too.

More about Baillie Gifford European, including charges

Baillie Gifford European key investor information

More about L&G Future World Sustainable European Equity Focus, including charges

L&G Future World Sustainable European Equity Focus key investor information

The best performing funds were value focused. LF Lightman European returned 7.70%, buoyed by the fund’s exposure to some of the more defensive and cyclical sectors. These helped drive performance over the period, namely allocations to energy, healthcare and financials.

The fund outperformed the average return of funds in the IA Europe excluding UK index by 11.14%.

More about LF Lightman European, including charges

LF Lightman European key investor information

Annual percentage growth
May 17 -
May 18
May 18 -
May19
May 19 -
May 20
May 20 -
May 21
May 21 -
May 22
Baillie Gifford European 5.21% -3.52% 30.30% 36.17% -27.53%
L&G Future World Sustainable European Equity Focus 7.75% -15.08% 20.28% 31.46% -22.69%
LF Lightman European N/A N/A -11.71% 54.56% 7.70%
IA Europe Excluding UK TR 2.48% -3.25% 3.08% 27.27% -3.44%

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/05/2022. Where no data is shown and is labelled N/A, figures are not available.

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    Our fund research is for investors who understand the risks of investing and that 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.

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    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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