- With elections in France and Germany, the political landscape of Europe is changing
- But experts say the influence of politics on investment markets may be exaggerated.
- Many European companies are recovering in profits after the pandemic hit
- It is not yet fully incorporated into share prices, so there is growth opportunity.
With gaps in food shelves, an energy crisis and rising inflation, it has been hard to look away from UK news in recent weeks.
But those who have watched our continental neighbours, too, will realize that the political landscape in Europe is changing dramatically.
Angela Merkel’s departure after 16 years in Germany is inevitably creating uncertainty and it is still unclear who will lead the coalition ruling the country. Negotiations can take months.
Meanwhile, France is also gearing up for the presidential election next year.
Political turmoil: President Macron faces elections in France next year while Angela Merkel remains caretaker leader in Germany
“Politics is always big in the eurozone,” says Jason Hollands, managing director of wealth platform Tilney.
‘However, it is important not to exaggerate the influence of politics on investment markets and there are good reasons to see opportunities in European equities, despite the uncertainties in the elections’.
Why is the tide just starting to turn?
One reason investment experts see opportunities like these is because Europe as a whole has underperformed over the past year.
Many companies suffered during the pandemic as consumers curbed their spending during the lockdown.
Yet, while their profits are now improving, these financial figures are not fully reflected in their share prices.
The STOXX600 index of major European companies has gained 16 per cent this year, says Tracy Zhao, senior fund analyst at wealth platform Interactive Investor.
That’s less than the same 20 percent increase in value for major US companies, as measured by the S&P500 index.
Given the pace of economic recovery in Europe, Zhao believes the region’s stock markets have merit.
But not all companies are enjoying recovery to the same extent. Darius McDermott, managing director of independent broker Chelsea Financial Services, says this gives fund managers an opportunity to discover companies that will benefit the most.
‘While Europe has its issues, it is home to some world-class companies that deliver year after year,’ he says.
‘There are also thousands of smaller companies across the continent, so there are a wealth of equity opportunities that are poorly researched and not covered by many analysts. This means that good managers can really add value.’
So where do opportunities lie?
John Bennett, co-manager of Henderson’s European Focus Trust, is among investment experts who believe there is potential in Europe.
He is adding to his investments in value stocks within the sector.
These are companies that appear to be reasonably priced, rather than tech firms that have seen rapid share price growth, especially during the pandemic. Bennett is finding these opportunities in many unaffected areas.
Backing a Winner: Those who have been successful in picking up European stocks have done well — and will continue to do so, according to QuotedData’s James Carteau.
“The most striking feature of the markets on both sides of the Atlantic has been the poor performance of price style versus growth since early summer,” he says.
“Our exposure to oil, banks and automobile companies has increased through stocks such as Lundin Energy, Total, Daimler, Stelantis and BNP Paribas.”
James Carthue, who runs investment research group QuotedData, says those who have been successful in choosing European stocks in the rough European markets have performed well and will continue to do so.
These have been the ‘stock-pickers’ market and not every manager has managed to navigate it successfully. The figures for three years give a good indication of who is doing well.
Funds give you broad exposure
While you can invest in European stocks directly on a funding platform, one of the safest ways to invest in the sector is through diversified funds.
This means that you don’t know much about the fortunes of just a few companies, but a number – in different regions and countries – are invested.
You can invest through a low cost tracker fund to get exposure to a wide range of European companies.
Such funds include Invesco STOXX Europe 600 and Vanguard FTSE Dev Europe East UK. Both are exchange traded funds and their shares are listed on the London Stock Exchange.
But if you prefer the skills of a fund manager to choose companies in this sector, there are several good European active funds that may fit the bill.
Zhao likes MAN GLG Continental European Growth, which has delivered 59 per cent returns in three years. The fund invests in a number of companies that are poised to benefit as consumer spending increases post-pandemic.
“A quarter of the fund’s portfolio is invested in consumer-cyclical stocks, which should perform well as economies improve,” says Zhao. ‘In the mid to long term, it offers investors the potential for capital appreciation and a well-managed downside risk compared to many peers.’
Both Zhao and Holland rate Leontrust Sustainable Future European Growth, which has delivered a return of 59 percent over three years.
“The fund has 20 per cent exposure to the German market,” says Zhao. ‘This means it may face short-term price volatility due to protracted alliance talks.’
Still, she says the fund has a good track record…