Investors Sell Europe, But Should They Be Buying?

UK investors withdrew almost £2 billion from European funds, but fund managers see exciting, lowly rated opportunities across the continent

David Brenchley 24 January, 2019 | 12:23PM

euros, US dollars, Europe, European equity, stocks

Europe saw great gains in 2017, as stock markets across the world powered ahead on the back of synchronised global growth and burgeoning corporate profits. But, as for so many global markets, last year was a leveller for Continental stocks.

The MSCI Europe Index lost almost 11% in euro terms in the 12 months to December 31 2018 – well down from the 10% gain seen the year previous.

True, that was during a tricky period for global equities. US interest rate rises and a strong US dollar wreaked havoc in emerging markets, Brexit sunk UK stocks and the US’s tech growth engine stalled.

Not to mention trade tensions between the US and China worsening, leading many to speculate upon the final outcome and run for cover in the form of safe haven assets.

Still, Europe, as ever, tried its best to trump the lot. Political troubles flared up in Italy leading to a clash between its new, populist Government and the European Union. While clearly a bigger headwind for the UK, Brexit uncertainty still does not help European firms.

Meanwhile, the continent felt the backdraft of trade tariffs, and its autos sector was hit by new, stricter emissions tests for diesel cars. As a result, MSCI Europe was outpaced by the broader MSCI World Index for the fifth time in the past six years in both euro and sterling terms.

Predictably, investors in UK funds sold out of Europe. The Investment Association’s Europe Ex-UK sector was one of the worst-selling sectors in 2018, with net outflows to the tune of £1.5 billion. It was the sector’s second-worst year for outflows in the past decade, though still well below 2016’s near-£6 billion record.

The European Smaller Companies sector saw money flood out, too, at almost £300 million.

On an individual fund level, a tracker was bottom of the list; the Morningstar Bronze Rated iShares Continental European Equity Index fund seeing net outflows of £511 million, followed by Invesco European Equity at £327 million.

A pair of Bronze Rated Janus Henderson funds run by John Bennett followed. Its European Selected Opportunities and European Focus funds saw £309 million and £291 million in outflows respectively.

Time To Buy Europe?

But were investors too hasty to pare back on their exposure to Europe? Sure, there are causes for concern – the eurozone crisis in the early part of the decade, the ECB unwinding QE and various political uncertainties to name a few.

But there are plenty of high-quality companies around and European fund managers are still optimistic. In fact, says Charles Glasse, manager of Waverton European Dividend Growth, “we’re finding a lot of stocks that we’re getting really excited about that are on low ratings and have good long-term drivers”.

In fact, Glasse claims that, historically, the best time to buy Europe has been when sentiment hits a trough. “Usually, when there’s a big selling crescendo, which tend to coincide with crises, the subsequent six-month returns of Europe are positive relative to the MSCI All-Country World Index,” Glasse says. “When everybody hates Europe, it’s the time to buy – and we’re in that territory now.”

The sentiment is echoed by Olly Russ and and Oisin O’Leary, co-managers of Liontrust European Income. Earnings growth figures are one cause for optimism, explains O’Leary.

In the past, European earnings have been tightly correlated with US earnings, that is until the eurozone crisis hit. Since then, US firms have gone on to report record high earnings, while Europe has stagnated.

Indeed, ever since then analysts’ estimates for European company earnings have generally started the year high before being repeatedly downgraded and ending up with little growth.

However, claims O’Leary, “2017 marked a step-change for Europe”. Earnings estimates held up well through the year, eventually coming in at 9% for the year. The following 12 months saw a solid 5.5% growth, while 2019 is expected to come in at over 9% once again.

That leads O’Leary to posit: “Three years compounded, that is the best part of 30% earnings growth. We think this shows that Europe has finally emerged from the eurozone crisis.”

2 European Stock Picks

On a company level, Glasse has no exposure to pure-play car stocks, but does like Autoliv (ALIV) – a supplier to the car industry.

Its main business is supplying airbags to the sector, an area that should see demand and, therefore earnings per share, thrive whether cars are run on petrol or electricity – or, indeed are autonomous.

In fact, Glasse suggests, “if autonomous driving really does take off you might end up having to put airbags on the outside of their cars in case they bump into pedestrians”.

Russ and O’Leary bought Italian Nespresso maker De’Longhi (DLG) in 2018’s fourth-quarter sell-off. O’Leary notes that the firm is currently delivering double-digit earnings growth due to a product that has penetrated the majority of workplaces in the UK and Continental Europe.

While the US market is currently a long way off that, the team thinks it’s a country that can catch up with Europe rapidly – particularly with George Clooney as the face of Nespresso, an advertising campaign De’Longhi does not have to contribute towards financially.

“That opens up a fantastic earnings opportunity for De’Longhi,” adds O’Leary. “It also has a very strong balance sheet with a large net cash position, which allows it to pay a 4% dividend yield.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Autoliv Inc DR656.60 SEK3.30
De'Longhi SPA17.17 EUR-0.52
Invesco European Equity UK Acc1,151.20 GBP-0.26
iShares Continen Eurp Eq Idx (UK) D Acc259.30 GBP0.00
Janus Henderson European Focus I Acc235.90 GBP0.17
Janus Henderson European Sel Opps I Acc1,926.00 GBP0.05
Liontrust European Income Instl Acc245.11 GBP-0.04

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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