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Europe splits on the north-south divide

Chris Salih reports that Europe funds have performed well but advisers are reluctant to move into the sector

Many IFAs have never been strong advocates of investing in Europe despite some of the best fund managers working in the sector.

While the debate has swayed between emerging and developed economies, Europe has often sat between the two in terms of attraction and has suffered as a result.

Figures from the Investment Management Association reflect the sector’s lack of popularity both for retail and institutional investors. It has been the worst-selling sector in four separate years – 2003, 2004, 2008 and 2009. Last year, the sector saw net retail outflows of £384m.

Yet the average fund returned 40.5 per cent in the past 12 months, which compares well with a similar return from the UK all companies sector of 48.7 per cent and for North America of 39.3 per cent. Over a five-year period, the European sector has outperformed UK all companies, returning 50.5 per cent, compared with 33.6 per cent, so why does it continue to be shunned?

Argonaut European fund manager Olly Russ says the UK and Europe are starting to feel the benefit of the economic recovery in the US.

He says: “If normal patterns hold, we should see a cyclical upturn in Europe, not as stellar as the US, but strong. Europe is almost never popular except at the very height of the market and the problem is that a lot of people think European companies are run like Europe, which is not the case.”

Russ says the further south you go in Europe the worse the environment seems to be. “Greece seems to be bringing everyone down and it is clear that a rescue package will be activated soon – the question is whether that will stop any further deterioration.

“The eurozone as a whole is in quite good shape with a 6 per cent budget deficit, which is around half that of the UK. It all revolves around Greece and whether the next domino will be Portugal.”

Aberdeen co-head of multi-manager Graham Duce says Europe is struggling in the current earnings’ season with companies reporting stronger figures in the US where 90 per cent of S&P companies beat their earnings’ expectations.

He says: “There are fears of contagion on the back of Greece and what it means for the currency. I think that the euro could retreat from here, which is another negative. However, given the cyclical nature of Europe, should it weaken, it is likely to boost exports on the whole.”

Premier senior investment manager for global equities Mike Jennings says fund managers face a challenge picking the right stocks, given that a number of bigger companies in the region are global and are not affected by the problems of Southern Europe.

He says: “You are now seeing the differences between the haves and the have-nots. Germany and France are improving steadily while the south struggles as the laggard. The net result is a divergence and the region does not look that exciting.

“We have also seen the euro weaken and the one thing that has hampered Europe is it has been the strong currency in a recession. A weakening euro will help exports, something it is starting to do now.”

Chelsea Financial Services managing director Darius McDermott says there are problems with a single currency and a single interest rate. “It shows that one size does not necessarily fit all and Greece is an example of that. There is also anaemic growth in large areas of Europe, although as a sector it did outperform last year.

“There is not much to like from a macro-economic perspective but there are strong managers and I would always recommend exposure to Europe in a balanced portfolio in the long term.”


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