And today we should get confirmation of exactly how far it has moved away from this recession, with 0.2% growth during Q2 from the block of countries that share the single currency expected.
Not conventionally attractive
Meanwhile, the FT highlighted the “fragile nature” of any eurozone recovery, adding that business sentiment underlines the “fragile nature” of the recovery.
Fragile it may be, but there are at last some good numbers coming from economic and sentiment indicators: manufacturing grew for the first time in two years last month, according to the Markit PMI index; the European Commission’s economic sentiment indicator rose in July from 91.3 in June to 92.5.
Banks, meanwhile, continue to keep a tight leash on lending because of “persistent economic uncertainty”.
true
In isolation, the Europe macro picture – dare I say it – looks pretty clear (not necessarily resoundingly positive, vibrant or pretty) but what about its position relative to the rest of the world?
On 5 August, Portfolio Adviser’s editorGary Shepherd argued that: “Hosting such a diverse array of cultures and economies, it is always dangerous to generalise about the prospects for Europe as one investment entity.
“However, with a Chinese slowdown, US tapering and Japanese Abenomics dominating the agenda this year, suddenly discussion on Europe is on the backburner. A quiet European recovery might be just what the doctor ordered.”
Phil Gent, a private client director at Jupiter, subsequently took this argument on a stage when he told me: “Whether the euro will continue into old age remains an unknown, but debt is a problem in developed markets generally as recent events in Michigan show and this should not be the reason to underweight Europe."
“Many individual companies remain attractively priced," Gent continued, "with strong yields and good growth potential. Markets however remain volatile and I will be looking to take advantage of weakness to increase exposure to the region.
“Given the latest announcement by Mark Carney on the likely trajectory of UK rates, cash continues to be at best a tactical asset for UK investors and European equities would appear a much better opportunity over the longer term.”
Lies, damned lies and statistics
To prove that you can use statistics to make any point you want to, take your pick of these: over the past 20 years, according to data from FE, European equity funds have been the best performers. In fact there is only one non-UK or European fund in the top 10 over the past 20 years and that is Jenny Jones’ (Ira Unschuld’s until 2002) Schroder US Smaller Companies Fund.
But, looking at IMA sales data over the past ten years, Europe has been the worst of all the retail sectors.
And, as Gary pointed earlier this month, European equity fund flows have picked up in the past 12 months though latest IMA figures show new retail outflows in June, the first since August 2012.
Portfolio managers have the tricky task of translating this macro picture of extremely low but positive and very slowly improving numbers into an investment choice so where should they look?
Rob Gleeson, head of research at FE, says: “Funds with a focus on stock-specific risk factors have shown that it is possible to still benefit from the continent’s best businesses and avoid the worst of the downside risks associated with Europe.”
While these types of fund cannot be guaranteed to provide repeat performances, they have all demonstrated viable strategies for cutting through the uncertainty and identifying potential, which is far more important than the returns they’ve generated in the past.
Gleeson mentions David Dudding’s Threadneedle European Select Fund, Alister Hibbert’s BlackRock European Dynamic Fund and, looking at country-specific propositions, the standout for him is the Barings German Growth Fund managed by Robert Smith.
Jim Snow is a senior portfolio manager at BNP Paribas Investment Partners, part of Paris-based BNP Paribas. His firm is incredibly Europe-centric and as a result he likes the stock-picking expertise of a couple of other European specialists.
Specialist stock-pickers
“Given our European client base, the majority of the portfolios that we manage have exposure to European equities that are typically pan-European exposure rather than Europe ex UK,” he says. “One of our preferred holdings is the Alken European Opportunities Fund. This has been a core investment within our European equity exposure for many years. The manager, Nicolas Walewski, has a very strong track record since launching Alken and we like his contrarian stock-picking approach and confidence to move into unloved or neglected areas of the market.
“We have also recently added a new value manager into our European portfolios: Metropole Selection. Metropole is a predominantly employee-owned firm and this is their flagship strategy. We like the concentrated, high conviction nature of the portfolio.”
When allocating to a European equity fund manager, the themes that comes out of our conversations with portfolio managers, as are the ones that Gleeson and his team are having, are seek out stock-picking expertise, ignore the external noise, look at the source of the company’s earnings rather than where it is based/listed and look ahead not backwards.
European equity funds may have had a great 20 years’ past performance, but how many investors today expect to have their money exactly where it is in another 20 years time?
Like many other equity sectors, Europe is a region that has a great past, a bright future but is in the middle of a shocking present. The move from ‘shocking’ to ‘bright’ has finally begun but it will still take a long time to become mainstream.
