European markets have caught the eye of investors in recent months following a tough 2016 for the region, but Coram director James Sullivan has said his team have focused in on Germany and France.
These are the countries that could weather the storm of any volatility in the euro while the likes of Spain, Greece and Italy could suffer.
He has opted for passive ETFs from iShares and Wisdom Tree to access German and French equity markets, as well as actively managed property funds including the Schroder European Real Estate Fund.
Sullivans’ stance on Europe follows news from Thomson Reuters Lipper earlier this year that passive European equity funds posted net inflows of €15.5bn last year, with active managers losing a total of €43.7bn
“We are trying to exploit the inefficiencies of the euro,” Sullivan said.
“The valuation of the euro works for some economies but not for others, I see it as a seesaw with Spain, Greece and Italy on one side and the likes of France and Germany on the other.”
Among the struggling nations such as Greece “unemployment is running uncomfortably high, GDP uncomfortably low”, Sullivan said.
He also raised concerns for the long-term prospects of the countries suffering a “brain drain” as younger, skilled workers and graduates move away to find opportunities elsewhere.
However, in Germany 14 months of continually high employment and a strong manufacturing base has prompted Sullivan to focus his attention there.
But there remains significant tail risks including the chance Angela Merkel will lose out in Germany’s upcoming elections as well as the risk of contagion from problems in Spain.
Spain’s fourth largest bank, Banco Popular, is a key concern that Sullivan feels is being overlooked.
“If you look at the pricing of Banco Popular it gives you goosebumps”, he said likening the bank’s position to that of Northern Rock in 2008.
He insisted the bank’s “importance to the Spanish economy cannot be underestimated.”
With problems in weaker European economies a risk across the euro area, Sullivan believes it is better to be exposed to only the countries that could stomach fluctuations in the currency.
