There are many reasons why investors might want to avoid Europe. Slowing growth, political crises and the ongoing Brexit uncertainty present several challenges and could make investors think twice before investing in the region.
Despite the negative headlines, however, Europe is home to many well-run companies and world-famous brands and investment companies investing in the continent have performed strongly. The average investment company in the Europe sector has returned 70% and 176% over five and ten years. Companies in the European Smaller Companies sector have performed even better, generating returns of 85% and 195% over the same timeframes.1
So where are investment company managers finding returns in Europe and how are they navigating the political and economic risks? Ahead of 31 October, the Association of Investment Companies (AIC) has gathered managers’ views from the Europe and European Smaller Companies sectors on whether Brexit is having an effect and whether the outlook for European investing could be brighter than some think.
Why invest in Europe?
Stefan Gries, Co-Manager of BlackRock Greater Europe Investment Trust, said: “Europe is home to some world-leading businesses that are often overlooked due to the attention given to overriding issues within the market in which they reside. We term these businesses ‘giants in niches’ as they dominate their respective end markets from their home in Europe.”
Stephen Macklow-Smith, Portfolio Manager of JPMorgan European Investment Trust, said: “It’s well documented that Europe has been at the mercy of low growth and an ageing population for some time. Many European companies have sought to solve this macro backdrop by focusing their attention on investing capital outside of Europe, in faster growing areas. The result? Many areas of the European stock market are seeing decent rates of revenue growth and profitability, in spite of a challenging backdrop for domestic growth. Europe also remains home to many global leaders.”
George Cooke, Lead Manager of Montanaro European Smaller Companies, said: “There is a huge amount of choice for investors in Europe, which is home to over 2,000 quoted smaller companies. Many are global market leaders, but identifying them in such a large pool can be challenging. There is little in the way of quality sell-side research. For investors with the patience and time to do their homework, however, discovering Europe’s small-cap ‘hidden gems’ can be rewarding. European small-cap companies have outperformed their large-cap counterparts by some 5.7% per annum since 2000.”
Where are you currently finding opportunities?
Sam Morse, Portfolio Manager of Fidelity European Values, said: “Against an uncertain backdrop in Europe I remain focused on investing in attractively-valued companies which are able to sustain consistent dividend growth; and most importantly can perform well across different market environments, irrespective of the macro backdrop. The challenge of finding companies that meet these criteria in the current environment has led to a reduction in the number of names in the portfolio over the past 12 months.
“That said, there are still selective opportunities and we have seen the likes of LVMH perform strongly on the back off encouraging results from two of its bigger brands: Louis Vuitton and Christian Dior. The company seems to be taking full advantage of the growing consumption of wealthy Chinese customers. I am finding opportunity in the luxury goods sector where companies possess defensive qualities thanks to their quality franchises and growing revenues in emerging markets.”
Stefan Gries, Co-Manager of BlackRock Greater Europe Investment Trust, said: “We have uncovered a multitude of companies in Denmark which exhibit what we believe to be a ‘Danish management style’ of strong entrepreneurialism supported by a flat culture and decentralised decision making. To put this plainly, local management teams are compensated for making the right long-term and wealth-creating decisions for the business as well as all its other stakeholders, including minority shareholders. This has led to better returns on invested capital and cash flow management, supporting the long-term potential of the business and indeed the shares.”
Stephen Macklow-Smith, Portfolio Manager of JPMorgan European Investment Trust, said: “As growth and value investors, we currently gravitate towards a number of healthcare and consumer goods names. We also see opportunities in some specialist semiconductor companies which are key suppliers to companies such as Apple and Tesla. On the value side, we see a number of compelling opportunities in areas such as insurance and stock exchanges which benefit from higher volatility, with stock exchanges also witnessing a wave of consolidation.”
Is Brexit having an effect?
George Cooke, Lead Manager of Montanaro European Smaller Companies, said: “Not particularly, which is unsurprising when you consider that only about 5% of our companies’ sales come from the UK. Despite heightening tensions around global trade, we do not spend time trying to second guess the direction of political winds. As an example, the portfolio had a high exposure to Italy during the constitutional referendum of 2016. As other investors fretted about the outcome of the referendum, we built positions in Italian businesses with quality characteristics and strong growth profiles that we felt had become undervalued. They subsequently contributed significantly to performance.”
Stefan Gries, Co-Manager of BlackRock Greater Europe Investment Trust, said: “Given the length of time companies have had to adjust, both to Brexit and to US-China trade tensions, we have already seen many altering their supply chains to reduce disruption. We have a preference for companies with strong pricing power which will see less impact from any potential tariffs as changes in price will not have a significant impact on demand for their products.”
Managers’ outlook for the region
George Cooke, Lead Manager of Montanaro European Smaller Companies, said: “The example of the last few years really drives home the point that bottom-up stock selection matters most. It would be hard to find anyone who felt Europe had been great from an economic or political perspective over the three years to the end of June 2019. Yet during this period, the NAV total return of the Montanaro European Smaller Companies Trust has been over 75% and the share price total return well over 100%.”
Stephen Macklow-Smith, Portfolio Manager of JPMorgan European Investment Trust, said: “We’re well aware of the risks to the European growth outlook should the UK exit without a deal. Additionally, we’re also closely monitoring the spillover effects of US-China trade tensions and the knock-on implications for Europe. Whatever happens on the trade front, the global reach of European companies, making products that the rest of the world queues up to buy, should ensure they survive and thrive in the long term.”
Sam Morse, Portfolio Manager of Fidelity European Values, said: “While European equity markets rose strongly over the first half of 2019, the recent resurfacing of volatility has served a timely reminder that few of the issues previously troubling markets have been resolved. Geopolitical risks continue to beset investors, with no clear end in sight. When it comes to the trans-Pacific trade dispute, it is likely that some European industries may in fact benefit by picking up business lost to their US and Chinese competitors on the back of worsening tensions, with some examples being aerospace, technology and telecommunications.
“We remain generally cautious and continue to maintain a balanced sector exposure, with a marginal overweight in defensive stocks. Despite more optimism now priced into the market following the Fed ‘pivot’, shocks around trade or geopolitics are still probable.”
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- Performance is the weighted average % share price total return for the Europe and European Smaller Companies sectors. Five-year performance is from 1 October 2014 to 30 September 2019. Ten-year performance is from 1 October 2009 to 30 September 2009.
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 363 members and the industry has total assets of approximately £197 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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