Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
Europe may be packed full of exciting companies – but it’s also been badly affected over the past few weeks by Russia’s invasion of Ukraine.
The military action caused European stock markets to plummet, and the ongoing uncertainty continues to make them volatile.
But should investors still consider companies in this region or is it best to steer clear in the hope that a peaceful resolution will finally be reached?
It’s fair to say that Russian President Vladimir Putin’s decision to invade Ukraine stunned the world and sent global stock markets into freefall. By early March, European indices such as the EURO STOXX 50 and Germany’s DAX were around 20% lower than they’d been at the start of the year*.
David Bridges, Fidelity’s geopolitical risk analyst, has warned of the likelihood of higher volatility over the coming weeks. “This is the start of a new cold war,” he said. “The conflict could take a variety of forms and isn’t likely to be resolved soon.”
According to James Rutherford, head of European equities at the international business of Federated Hermes, the conflict is impacting a wide range of industries. “Prices of commodities, metals and energy look like they’re only going to go one way,” he said, reiterating his belief that further inflation was likely. “This will have a detrimental impact on consumer confidence and put further pressure on margins,” he added.
Graham Secker, head of Morgan Stanley’s European equity strategy team, pointed out that quite a lot of bad news had been priced into European stocks. However, while he suggested this may provide an attractive entry point for longer term investors, he believes people need to be cautious. “European markets will likely remain tricky in the short term as investor sentiment oscillates between hope and fear,” he warned.
Clearly, there is a great deal of uncertainty when it comes to the potential impact of the Ukraine conflict, alongside the potential inflationary issues. However, as a longer-term investment, Europe is hard to ignore. It’s home to some of the world’s most recognisable – and successful – names in a variety of sectors.
As far as investment portfolios are concerned, there are many respected fund managers in this area that have many years of experience.
And Europe remains popular with UK investors. In fact, they currently have £64.8bn invested in the IA Europe ex-UK sector, according to Investment Association data for January 2022. This is £10.5bn more than in January 2019. However, the data also shows nervous investors have taken £157m out of the sector this year.
UK investors also have £2.7bn invested in the IA European Smaller Companies sector, although £16m was also withdrawn during January this year.
So, what funds are worth considering? Well, there are plenty of experienced managers running portfolios in this area. Your decision will largely depend on whether you want a fund focused on larger, more dependable companies or innovative smaller firms.
It’s important to consider the aims and objectives of the different portfolios to ensure they meet your specific needs.
Here we highlight three that may be of interest.
This fund has been co-managed by Mark Nichols and Mark Heslop for just under three years. They try to identify companies with first class management teams, strong business models exposed to the drivers of long-term growth and sustainable returns on capital.
When assessing stocks for inclusion in the portfolio, they consider a time horizon of 3-5 years and beyond, focusing on specific characteristics such as barriers to entry, strong branding, the holding of key patents, efficiencies of scale, and existing customers having high switching costs.
Another characteristic is industry structure, where they look for industries where there is no single customer who can drive prices down and no single supplier who can squeeze profit margins – because that means businesses are better able to generate consistent cash flow.
The managers of this fund overwhelmingly invest in companies that are large or medium in size, although they can consider other opportunities. Companies at attractive valuations are favoured, with the ideal scenario being to make a small number of long-term investments in growing companies with strong management teams.
Co-managers Chris Garsten and Charles Glasse have run the fund since 2001 and believe that only a third of European companies are run for shareholders. They avoid weaker businesses with poor corporate governance and instead focus on finding companies with five key attributes; aligned interests, earnings visibility, pricing power, cash generation and return on capital.
Stocks in Waverton European Capital Growth fund do not immediately have to have all these attributes. Indeed, many of their best ideas come from companies which are in the early stages of reform. Often a new management team will be a part of this. They have a ‘one-in, one-out’ philosophy which ensures only their best ideas are represented in the portfolio.
This fund, which is managed by Ollie Beckett and Rory Stokes, has a ‘style agnostic’ approach to investing. In effect, this means that the fund can consider growth companies at a reasonable price as well as looking at neglected areas of the market.
The managers can also embrace very small companies. This enables them to find so-called hidden gems that some of their rivals may have ignored. They will also target companies at different stages of their life cycle – allowing the managers to diversify their revenue streams accordingly.
The process specifically sees the managers target four types of companies. These are early cycle companies; quality growth; mature businesses and turnaround companies – these may have management looking at cost cutting, reasonable margins and asset disposals.
*Source: FE fundinfo, total returns in sterling, 1 January to 8 March 2022