Is it time to stop being a Europhobe?
(Filed: 29/08/2001)
European funds have suffered, but experts see the Continent as a land of opportunity, says Paul Farrow
Sea of opportunity: The European economy may be in hot water but many analysts haven't yet lost faith
As any hapless investor in European funds will tell you, the Continent has been going through tough times. Fund managers are convinced that Europe is now the land of great opportunity, although it has to be said that the past few years have been littered with false dawns.
At the beginning of the millennium, experts predicted that Europe was going to have a storming year. Their predictions were never realised as the region failed to escape the effects of worldwide stockmarket jitters. Unperturbed, analysts tipped Europe once again at the beginning of this year ("Europe", by the way, is fund-manager shorthand for the Continent).
They said that the technology story is not going to go away and Europe has some of the biggest players. Nokia in Finland and Ericsson in Sweden, for instance, account for half the global handset market.
But the weak euro and the continuing fallout of the collapse in technology-related stocks have dashed any hopes of a quick recovery. The revolutionary WAP phone has yet to make anything like the envisaged impact, while telecom stocks have been strapped for cash ever since the 3G licence auctions this year.
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Many European investment funds have been hit hard - none more so than the hugely popular £2 billion Invesco GT European Growth, which became the worst-performing fund in the European sector over the past 12 months after falling by 48 per cent.
But companies continue to launch new funds in the teeth of the poor macro-economic outlook.
Next month, Royal & Sun Alliance is due to bring out its European Prime Fund, which will invest in only 30 stocks. R&SA points out that, while many investment houses bring out new funds at the top of the market, a bear market is often a better time to invest.
Just a few weeks ago, the first two funds issued by new fund management group, New Star Asset Management, included a European unit trust managed by former Jupiter manager Richard Pease.
Davina Curling, R&SA Prime fund manager, said:"European markets may have been in the doldrums recently, but that doesn't mean there aren't some sparkling individual investment stories on the Continent.
"A fund with a concentrated portfolio is better-suited to volatile markets because managers can focus on their best money-making ideas."
Curling's view is echoed by Alex Darwell, who manages Jupiter European Growth. Although you cannot ignore economic conditions completely, stock selection is key, he said. "The macro-economic conditions may not have been favourable, but there are still some fantastic dynamics happening in Europe at corporate level. There are new companies with genuine products that have genuine growth prospects."
Reed Elsevier is a case in point. Earlier this month the Anglo-Dutch media group announced it was set to achieve double-digit earnings growth a year ahead of schedule, despite a downturn in advertising revenues.
Mr Darwell said: "The market is, not surprisingly, very pessimistic at the moment and no one is giving it the benefit of the doubt. Periods of doom and gloom is often the time to buy into the market."
Cuts in European interest rates should also hand equities the boost they need, fund managers say. The European Central Bank reduced rates in early May in an attempt to support economic activity and help companies. The hope is that this move will stimulate borrowing to enable companies to expand business activity.
Tax reforms in France, Italy and Germany could also raise consumer spending and generally create a more business-friendly environment. German corporation tax is due to drop below the 40 per cent barrier; France and Italy look set to follow.
Tax cuts have already reaped rewards for Ireland, attracting foreign investment particularly from US multinationals. Dell, Intel and Microsoft have all been using Ireland as a springboard to Europe as a whole.
Mark Pignatelli, European fund manager at Schroders, cites the growing equity culture on the Continent as one of the most compelling long-term arguments for investing in Europe.
The growth of private pensions is another, as it will result in more and more cash going into capital markets. The resultant increase in liquidity should drive markets higher.
For example, the German mutual fund market is in its infancy compared to that of, say, the US or the UK. But German people are just starting to get a taste for equity-linked investments. They still have relatively little choice in many areas, although the number of collective funds (unit trusts) soared by 60 per cent from 919 to 1,477 between 1995 and 1999.
The German pension system is coming under pressure from an ageing population, and people are beginning to realise the need to take more responsibility for their own retirement income.
But while fund managers are bullish about the prospects for Europe, this enthusiasm is by no means new. And they are quite capable of making wrong calls.
Late last year, Pignatelli predicted that European markets were about to storm ahead. In a bid to take advantage of any market upswing, he took up some aggressive positions in many telecoms companies. He also admits to feelings of frustration that he had expected the ECB to cut interest rates long before May.
He got it wrong and the fund has fallen 26 per cent since January.
Ben Yearsley, an independent financial adviser at Hargreaves Lansdown, reckons investors with balanced portfolios should have up to 20 per cent exposure to Europe, because it accounts for such a large part of the global economy.
But he added: "Europe certainly has problems ahead. Germany is technically in recession and the ECB appears reluctant to cut interest rates sufficiently to help. The stockmarkets are going to be flat for the next six to eight months. But it's still important to have exposure to European markets."
money.telegraph.co.uk |
