Funds to Profit from Better European Earnings

European investors have had to come to terms with Italy’s political situation and a closing deadline on Brexit and are focusing on better company earnings

Samuel Meakin 19 September, 2018 | 8:26AM
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Despite the dual headwinds of European political vulnerabilities and escalating trade-war fears, the MSCI Europe index has managed to deliver a small positive return of more than 2.5% in euro terms in 2018. Within this, investors have seemingly sought solace in perceived “higher-quality” investments despite some arguably elevated valuations.

An indication of this can be seen in the relative performance of the MSCI Europe Growth index versus the MSCI Europe Value index, with the former having outperformed the latter by around 2.6 percentage points.

European investors have had to come to terms with Italy’s political situation and a closing deadline on Brexit. This has dampened risk appetite in the region as investors contemplated the possible repercussions on the European banking system and any contagion risk associated. The MSCI Europe Financials index is down more than 3% in euro terms, the only GICS sector alongside telecoms to post a negative return in the period.

The best performing sector in Europe has been energy, benefitting from the rise in the oil price since the start of the year. At the stock level, fund managers have reported increased dispersion in company earnings and returns, which should provide opportunities for active managers in the space despite the relatively subdued environment.

Which Funds?

Fidelity European Growth holds a Morningstar Analyst Rating of Bronze. The fund is managed by Matt Siddle, who enjoys the support of the very well-resourced analyst team at Fidelity, and in our view he has made good use of this resource. He mainly seeks to invest in quality companies at attractive valuations, but he can also invest tactically in expensive stocks with growth potential and low-quality companies trading at extreme undervaluation.

BGF Continental European Flexible is managed by Alister Hibbert, who has over 20 years’ investment experience. The manager favours companies with strong franchises, run by quality management, and whose expected earnings potential is underestimated by the market. The approach is unconstrained and can lead to large sector bets, so investors must be able to handle the potential for volatility. However, the long-term performance record is very strong.

A version of this article appeared in Professional Wealth Management magazine

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.

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About Author

Samuel Meakin  is a fund analyst for Morningstar