With gaps in food shelves, an energy crisis and rising inflation, it has been difficult to look away from the British news in recent weeks. But those who have also kept an eye on our continental neighbors will find that the political landscape in Europe is dramatically reshaping.
The departure of Angela Merkel, after 16 years at the head of Germany, inevitably creates uncertainties and it is still unclear who will lead the coalition that will govern the country. The negotiations could take months.
Meanwhile, France is also preparing for the presidential elections next year.
Political unrest: President Macron faces elections in France next year while Angela Merkel remains interim leader in Germany
“Politics is becoming increasingly important in the eurozone,” said Jason Hollands, managing director of wealth management platform Tilney. “However, it is important not to overestimate the influence of politics on investment markets and there are good reasons to see opportunities in European equities despite the uncertainties the election brings.”
WHY THE TIDE JUST STARTS TO TURN
One of the reasons investment experts see such opportunities is that Europe as a whole has underperformed over the past year.
Many businesses have suffered during the pandemic as consumers curtailed spending during the lockdown. Yet while their profits are now improving, those financial numbers are not fully reflected in their stock prices.
Tracy Zhao, senior fund analyst at wealth management platform Interactive Investor, points out that the STOXX600 index of major European companies has climbed 16% this year. This figure is lower than the equivalent 20% increase in the value of major US companies, as measured by the S & P500 Index.
Given the momentum of economic recovery in Europe, Zhao believes the region’s stock markets have merit.
But not all businesses benefit from the recovery to the same extent. Darius McDermott, managing director of independent broker Chelsea Financial Services, says it gives fund managers the ability to research the companies that will benefit the most.
“Although Europe has its problems, it is home to world-class companies that deliver year after year,” he says. “There are also thousands of small businesses across the continent, so there is a plethora of equity opportunities that are under-researched and not covered by many analysts. This means that good managers can really add value.
WHERE ARE THE OPPORTUNITIES?
John Bennett, co-manager of the Henderson European Focus Trust, is one of the investment experts who believe there are opportunities in Europe.
It adds to its investment in value stocks in the region. These are companies that appear to be reasonably priced, rather than those like tech companies that have seen rapid share price growth, especially during the pandemic. Bennett finds these opportunities in several unloved sectors.
“The most striking feature of the markets on both sides of the Atlantic since the start of the summer has been the gross underperformance of the value versus growth style,” he says.
“Our exposure to oil, banks and automakers increased, through stocks such as Lundin Energy, Total, Daimler, Stellantis and BNP Paribas.”
James Carthew, who heads investment research group QuotedData, says in bumpy European markets, those who are successful in picking European stocks have done well and will continue to do so.
“These are stock picking markets and not all managers have managed to come out of them successfully. The three-year numbers give a good indicator of who’s doing well, ”he says.
FUNDS GIVE YOU GREATER EXPOSURE
While you can invest in European equities directly on a wealth platform, one of the safest ways to invest in the region is to use a diversified fund. This means that you are not too exposed to the fate of a few companies, but that you are invested in a number – in a variety of industries and countries.
You can invest through a low cost tracker fund to gain exposure to a wide range of European companies. These funds include Invesco STOXX Europe 600 and Vanguard FTSE Dev Europe excluding UK. These two funds are traded on an exchange and their shares are listed on the London Stock Exchange.
But if you prefer the skills of a fund manager to handpick businesses in the region, there are several good European active funds that can do the trick. Zhao likes Man GLG Continental European Growth, who has returned 59% in three years. The fund invests in a number of companies that are expected to benefit from the recovery in consumer spending after the pandemic.
“A quarter of the fund’s portfolio is invested in consumer discretionary stocks which should perform well as economies recover,” Zhao says. “Over the medium to long term, it offers investors the prospect of capital appreciation and well-managed downside risk relative to many peers.”
Zhao and Hollands both rate Liontrust Sustainable Future European Growth, which has returned 59% over three years.
“The fund has a 20 percent exposure to the German market,” says Zhao. “This means it may experience short-term price volatility due to protracted coalition negotiations.”
Still, she points out that the fund has a good track record of delivering strong returns by investing in companies that achieve resilient growth and are managed sustainably.
Hollands describes the fund as a “first choice” for investors who want to target companies that improve people’s quality of life – whether through environmental efficiency, medical advancements or other positive social impacts.
For those looking to invest in small European companies, James Carthew of QuotedData recommends Montanaro European Smaller Companies, which is up 134% over three years. “Fund manager George Cooke’s focus on quality and growth has helped the fund to dominate the performance charts during the pandemic, but this does not appear to have resulted in slower returns during the recovery phase,” did he declare.
For larger companies, Carthew recommends the BlackRock Greater Europe investment trust, up 113% over three years. The secret to the trust’s success, he says, is to focus on companies with sustainable growth.
McDermott likes Marlborough European Multi-Cap and Comgest Growth Europe ex UK, which have been among the top ten performers in the European fund universe over the past three years.
“The Marlborough fund favors small and mid caps and has a truly exceptional performance history,” he said. It is up 89% in three years.
“The Comgest fund is more focused on quality growth companies and is also extremely well managed and consistent,” he adds. This fund is up 67% over three years.
POSITIVE OUTLOOK FOR INCREASING COMPANY PROFITS
Carthew urges those with short-term prospects to be cautious, noting that the German post-election talks “will make some investors uncomfortable.”
“Markets hate uncertainty,” he says. “Investors may be set for a bumpy ride over the next couple of months. However, uncertainty has been the norm for some time now.
He adds that he believes the funds that have worked well in recent months should continue to thrive.
It is not just the bickering over who runs Germany that will affect the European market in the long run. The fuel crisis, as well as the Covid19, will continue to affect the valuations of companies.
But there are good reasons to be optimistic about how things will turn out. Chris Beauchamp, chief market analyst at the IG investment trading platform, said “the outlook still looks good for European markets as a whole, fueled by improving corporate earnings.”
GERMANS MAY ISSUE BONDS
While a coalition government is rare in the UK, the Germans rarely have anything else.
The complex electoral system means that although elections were held at the end of last month, the center-left Social Democrats (SDP) claim a narrow victory, it is still far from clear what will be the direction of the trip. .
Parties must now attempt to form a coalition – and it may not be the Social Democrats who are successful, as all parties are free to attempt to strike coalition deals. Due to the dispersion of votes this time around, any coalition will contain three or more parties. Until it is decided, Angela Merkel remains as interim leader. She will not be able to make new laws, but she can make government work.
Darius McDermott of Chelsea Financial Services says it’s hard to see now what the impact of new German leadership will be.
Instead, markets will move when it becomes clear who ends up in the coalition and their likely impact on economic policy.
“Much will depend on the ability of the SDP to move its initiatives forward,” McDermott says.
“For example, they think fiscal austerity is bad in the post-Covid environment, so they might look to increase spending.
“This could mean more German bond issuance and downward pressure on bond yields.”
Investors should not hold their breath for clarity.
In 2017, the post-election process took six months to settle, while Germany’s European neighbors may take longer.
The Netherlands have yet to conclude negotiations after their March elections, while in 2010 it took Belgium 541 days to form a government.
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