Buying Europe (and ignoring Brexit)

If you’re totally over the word ‘Brexit’ right now, don’t worry, respite is at hand. You can now sub it out for Frexit (France); Swexit (Sweden); Nexit (Netherlands); Grexit (Greece); and Czexit (Czech Republic) to name a few.

I’ve never known so many fund managers to be so preoccupied with the political situation as those specialising in Europe are right now. And not without reason. After the UK voted to leave the European Union, it’s not out of the question that dissatisfied citizens across the continent will want to follow suit.

If more exits were to follow (a scenario most commentators are not betting on at the moment, it has to be said), the total upheaval of currency, trade pacts and business would likely impact markets on an unprecedented scale. So fund managers, who have a responsibility to consider how their investments may perform under every possible scenario, are right to speculate.

For investors, however, such second-guessing may not be helpful. As we saw with Brexit itself, sometimes the bookies’ favoured outcome is not the one that transpires. Plus, with the schedule of upcoming national elections, and the time needed to actually put referendums into action, I’d say we’re looking at another couple of years before we see any more concrete decisions. In the meantime, you could be missing out on some good opportunities.

So let’s leave the ‘leave’ debates to the experts and focus on finding good funds that can take advantage of some of the positive themes coming out of Europe – yes, there are a few good news stories too!

European corporate bonds

Last month, the European Central Bank (ECB) began its corporate, or company, bond buying program in a bid to pump yet more money into the EU’s economy. While it has already been buying government bonds for a few years now, this is the first time it has expanded its shopping list to include corporates.

The current round of stimulus is tentatively proposed to finish in March next year. However, many are now predicting it could be extended beyond that date to make up for political paralysis at various country levels.

The ECB buying definitely appears to have supported the asset class in the volatility post-Brexit vote. Lewis Aubrey-Johnson, Invesco Perpetual’s head of fixed income products, said corporate bonds that were eligible for ECB purchase held up well in the initial few days.

Elite Rated fixed income funds that hold a decent percentage of their portfolios in European corporate bonds include the Invesco Perpetual Monthly Income Plus, the MI TwentyFour Dynamic Bond and Jupiter Strategic Bond.

European equities

This corporate bond buying may also help to support European equities. After all, the crux of the idea is that the ECB makes available a lot more funding to companies, who can then borrow more easily to facilitate business investment and expansion.

What’s more, to look at another period of turbulence in the eurozone’s recent history, investors who bought into European equities when they were at their low point during the euro crisis of 2011–2012 would be up 77% today in sterling terms (versus the UK stock market’s 58% over the same period)¹.

We’re by no means seeing the same kinds of stock market dips post-Brexit vote that we saw back in 2011. But the key point about buying high quality stocks with good fundamentals, when others are selling on sentiment, remains relevant.

Active managers who we particularly like in this space include Alexander Darwall, of the renowned Jupiter European team. Alexander runs the Elite Rated Jupiter European fund, which has a track record of success in lots of different economic environments. The BlackRock European team are also highly regarded and they have a suite of Elite Rated funds run by three different managers with three different focuses: BlackRock Continental European, BlackRock Continental European Income and BlackRock European Dynamic.

¹FE Analytics, Euro STOXX vs FTSE All Share, TR in GBP, 12/09/2011–08/07/2016