How will the next big event in Germany impact markets?
I attended a rather fabulous wedding near Chemnitz in Eastern Germany over the August bank holiday....
You know that expression can’t see the wood for the trees? If European markets are the wood, the eurozone has a whole lot of trees impeding the view right now. Are investors missing the bigger picture?
It’s that time of year when everyone is rushing to make their last-minute ISA allocations. But a look at the 20 most popular ISA funds this season shows just two European equity funds among them – BlackRock European Dynamic and Threadneedle European Select at 12th and 14th respectively¹.
Instead, individual investors have been withdrawing their money from European equity funds at a rate of knots, according to figures the market data firm EPFR². In a striking contrast, though, institutional investors are buying up. They added US$1.1bn to funds investing in European companies in the seven days to 22 February³. That amount was as much as had gone into these funds over the entire four preceding weeks combined.
If the institutions are right and European markets do well in the coming year, a whole lot of regular investors may miss out on the upside. Here are three tips that may help you to see the wood form the trees.
To continue with our analogy, let’s take a closer look at these trees. One looks very much like Marine Le Pen, France’s far right presidential candidate, while another resembles Geert Wilders, the ultra conservative Dutch politician. Yet a third appears to be the current German chancellor and centrist Angela Merkel, who is losing ground in the pre-election polls.
All three countries are heading to the vote in 2017. Anti-European Union (EU) sentiment is brewing and populist parties and far-right campaigners are capitalising on the spirit of discontent. If some of these people do become Europe’s next leaders, it may well mark the beginning of the end for the eurozone.
As we’ve seen with Article 50, however, these things don’t happen quickly. I’ve been touting the line for a while that investors shouldn’t necessarily be put off Europe because of this uncertainty – there are still excellent companies to be found. Concerns around the long-term future of the eurozone are justified, but the deluge of negative political news we’re getting from the continent may be clouding some more immediate promising signs within the economy.
Also in the papers last week was the news that every single eurozone economy recorded positive inflation for the first time in nearly four years 4. Inflation within a target range (typically 2% to 3% for developed economies) is one of the key signs of a healthy economy, as some price growth encourages consumer spending (because you know whatever you don’t buy now may be more expensive in the future) and boosts businesses’ profits.
The opposite (deflation – or falling prices) is not such good news as people are more reluctant to spend and paying off debt gets harder because your money is worth less.
In a sort of counterpoint to this, don’ forget that the European Central Bank’s (ECB) economic stimulus program is still going. This means that Europe is currently getting the double whammy of supportive monetary policy (i.e. low interest rates to encourage businesses to borrow and corporate bond purchases from the ECB), as well as finally improving economic conditions.
BlackRock recently published its economic growth outlook for the G7 countries. According to its estimates, two key eurozone economies, France and Germany, are likely to have higher growth than the consensus view is currently predicting. Unemployment is also falling and reached a seven-year low in the eurozone at the end of 20165.
The upshot of this is that the fund group has now also raised its earning expectations for companies across Europe in the coming quarters. When I caught up with Alister Hibbert, manager of the BlackRock European Dynamic fund, in January, he made the point that earnings in the region have really stood still since 2011 – so this is definitely a positive sign. No-one is saying we should expect miracles, but I’m definitely noticing a more optimistic tone among the European equity fund managers than I have done in some time.
Given European stocks haven’t posted the kinds of recoveries we’ve seen in UK and US stocks over the past few years, they still look reasonably valued versus other global markets. The very fact that, until now at least, investors haven’t been favouring the market, is what leaves room for some excellently-priced opportunities now.
To get exposure to Europe, a fund whose manager knows both the economy and the market inside out is a smart play. That way, you can leave it to them to pour through company financials, keep on top of minute policy changes at the ECB and closely follow election commentary. You can stick to the more enjoyable sides of Europe like, say, the wine and the cheese.
Some funds I particularly like include the Elite Rated BlackRock trio — BlackRock European Dynamic, BlackRock Continental European and BlackRock Continental European Income. Jupiter also has a very strong European team and we Elite Rate the Jupiter European fund and the Jupiter European Opportunities Trust, both of which are run by Alexander Darwall.
1 Chelsea Financial Services ISA sales client data, January 2017
2-3 EPFR figures published in Financial Times, 22/02/2017
4 Financial Times, Every single eurozone economy has recorded positive inflation, 22/02/2017
5 Standard Life Investments, European Equities commentary, February 2017