Last week marked five years since Mario Draghi, president of the European Central Bank (ECB), uttered those three little words in the midst of the European sovereign debt crisis: “Whatever it takes”.
He was referring to what the ECB would do to preserve the euro and thereby also keep the eurozone intact. Investors who believed in him have been rewarded: the MSCI Europe ex UK is up 106.7%^ since the speech, compared with returns of just 66.8%^ from the FTSE All Share.
As investors begin to wonder if the UK and US stock markets are running out of steam, does Europe offer any more value or opportunities? Juliet Schooling Latter, director of FundCalibre, looks at the pros and cons of the asset class.
Three reasons to be optimistic
- The economy is improving: having worried about deflation for most of the past five years, inflation in the eurozone is now coming through. At the same time, consumption is rising, employment numbers are improving and the economy has started to grow.
- Companies are in better shape: first quarter company reporting was encouraging to say the least. Earnings upgrades were plentiful and, perhaps even more significantly, earnings expectations for the rest of the year are improving. This is a reversal of the trend we’ve seen for the past six years or so, when expectations declined rapidly over the course of each year.
- Valuations are still attractive: European equities look better value compared with other developed equity markets and their own bond market. Bond yields are already very low. With the possibility that the ECB’s nine-year rate cutting cycle could soon be at an end and the bond buying programme due to start tapering at the end of the year, an investor rotation from bonds to equities could be on the cards.
Three reasons to be cautious
- Political risks remain: the election of business-friendly Macron in France steadied markets and the potential re-election of Merkel in Germany bodes well for relationships between Europe’s ‘core’ economies. However, if we have learned anything in the past couple of years it is that we shouldn’t be complacent when it comes to the populist vote, and there is a potential Italian election on the cards next year.
- Tapering tantrums: having successfully done ‘whatever it takes’, Draghi will, at some point, have to wean Europe off the QE drug. When he announced “deflationary forces have been replaced by reflationary ones”, back in June, he got a taster of what the reaction may be when he starts winding down the €60bn-a-month bond-buying programme and/or raises interest rates. On the announcement, the euro rose, European government bond yields spiked and equities took a tumble.
- A stronger euro: a large number of European companies get their earnings in US dollars. If the euro continues to rise, this could hurt the all-important earnings, dampen profits and just take the edge off what is looking like a reasonable recovery.
Three funds in which to invest
BlackRock Continental European Income
This fund invests in companies of different sizes but with the similar characteristics of reliable, sustainable dividends; potential dividend growth and protection against inflation. This results in an attractive yield (currently 4%) and the fund being less volatile than the market and its peers.
GAM Star Continental European Equity
This fund invests in large companies, with the manager preferring those he believes will grow faster than the index. He aims to buy stocks at the point where they are either out-of-favour or where growth prospects are believed not to be fully reflected in the stock price. Meetings with industry experts and company management are of high priority.
Henderson European Selected Opportunities
This is a high-conviction portfolio of 50-65 mega and large-cap stocks. The fund has neither a growth nor a value bias, with the manager instead having a very pragmatic approach. He takes the macroeconomic environment and sector trends into consideration, as well as looking at individual companies.
^Source: FE Analytics, TR in GBP, 26/07/2012 – 19/07/2017