On Thursday, for example, Royal London Asset Management announced it was adopting a new strategy for its European equity offering, renaming its product from an income to opportunities fund. Part of this strategy means a greater exposure to small and mid-cap stocks.
“Investors are seeing signs of improvement in the Eurozone economy, incentivised by a pro-business and pro-growth agenda,” fund manager Neil Wilkinson said.
Commenting on the change, Hargreaves Lansdown senior analyst Laith Khalaf said the change is down to the marketability of the fund.
“Europe is not necessarily the place investors immediately look for income and a European income strategy is likely to be crowded out by old fashioned UK equity income on one side and the newer breed of global income funds on the other,” he said.
Taking a closer look at small caps in Europe, Brewin Dolphin fund analyst Michael Paul said the team has been analysing the European small cap universe but is holding off from making a recommendations yet.
“Small caps can be a good opportunity for an active manager to create alpha but there are risks,” he said.
The current environment shows that investors are less worried about the economy than they were during the crisis and fears have largely dissipated. This could mean they are generally more willing to take on risks, which could be investing in small caps, depending on the investor’s mandate.
However, not all investors believe that small and mid-caps are the way forward.
While he likes the oppotunities available in the European equity space, Patrick Connolly, certified financial planner at Chase de Vere, said: “Investors keen on European smaller companies would be concerning.”
“In the past years small caps have outperformed but now a large amount of these companies are looking expensive. Meanwhile larger companies have been left behind and are more likely to gain business in areas of the world that are growing.”
Deep value stocks and large caps are also on the horizon for Rob Jones, co-head of European equities at UBP, who points out that they are currently outperforming midcaps.
What’s ahead
Risk and uncertainty are never far away from the investor horizon, even if the waters seem calm in the less active summer months. On Thursday Russia announced the imposition of sanction against European exports. While it is quite early to assess the likely impact on European equities, the news headlines contribute to market nervousness.
“Russia is sitting on the doorstep of Europe. We are seeing some retaliation as stock markets dislike uncertainty. The longer the situation drags on the more it will weigh on sentiment. That’s when it becomes negative for markets,” Connolly said.
But, despite this and other geopolitical risks, Europe is still offering opportunity.
“We are still playing on the recovery theme. Looking ahead we could potentially be increasing our weightings of companies already held in the fund. Areas that we might add to are Southern European names, as well as financials,” Jones said.
For Connolly the European equity story also remains attractive, but selectively so.
“We continue to invest in Europe. If there is a fall back of prices in the stock market this could create a buying opportunity. We would definitely be buying and not exiting.”
Opportunity
Uncertainly and potential risk is being thrown at investors left and right but European equity is an opportunity, according to overall investor consensus. The strategies and approaches differ, however. For some, the mid- small cap space offers an opportunity and a chance to tailor fund strategy. Others seek the large-cap space in the hunt for profit. The story of European equity is likely to continue but investors are on the watch to see how they can best position funds.
