After a 12-month delay due to the global pandemic, Euro 2021 will finally get under way this Friday when Italy and Turkey kick things off in Rome. This football fan could not be happier.
Believe it or not, England is currently the favourite to lift the trophy, as it’s seen by many as our home competition – six of our games could be played at Wembley.
Can Gareth Southgate go one or two better than he did in Russia three years ago? Or will the French, led by Didier Deschamps (who spent a season with my beloved Chelsea and won the FA cup), come out on top? There’s much to play for, especially as Belgium, Spain and Portugal also boast strong squads – and we’ve learned never to underestimate the Germans…
While we may share a love for the beautiful game with our European neighbours, we still don’t seem to like their shares, however. Unloved by investors for years, European equities have seen net outflows each month so far in 2021*, despite posting strong returns on a par with those from both the UK and the US.
Are investors therefore missing out on opportunities as Europe finally emerges from the pandemic? Should we be allocating more to the region instead of less?
“We are still relatively early in the opening up of economies, particularly in Europe, which is lagging behind the UK and the US, commented Niall Gallagher, manager of GAM Star Continental European Equity. “We would expect this opening up and the economic acceleration to continue into Q2 and therefore a continuation of many of the cyclical trends that we have seen in Q1 and in Q4 of last year. Overall, our view is a reasonably decent market progression geared or biased towards those stocks that are most exposed to the reopening.”
Richard Woolnough, manager of M&G Optimal Income fund, has also been adding to the continent’s fixed income of late – and to some of its equities. Key trades recently included an ongoing rotation from long-dated US dollar investment grade bonds and into European investment grade bonds.
“When government bond yields rise as a result of a better macroeconomic outlook, credit spreads tend to fall,” Richard said. “This is what we have experienced so far, however more so in the US as opposed to Europe, where the prospect for growth is still lower compared to the UK and the US. As a result, European names have lagged recently, so we believe they may have more capacity to gain in price over the coming periods. Since May 2020, we have effectively doubled fund exposure in the latter because of what we view as attractive valuations.
“Within equities, overall exposure remains close to 4.5%. We continue to look for potential opportunities in this asset class and in fact have been building a position in the shares of Orange, the French telecom company, which we believe is trading cheap both in absolute and relative terms. In general, our equity exposure is mainly invested in European and UK companies, with a tilt towards the more cyclical sectors.”
In the spirit of the tournament, and for those looking to increase exposure to Europe, here’s our suggestions for different ways to access the region – depending on whether you prefer a defensive or attacking stance to your portfolio:
To add some excitement up front, we would suggest Baring Europe Select Trust which invests in small and medium-sized companies and is run on what is known as a GARP (Growth at a Reasonable Price) basis. Another alternative would be Jupiter European Smaller Companies or T. Rowe Price European Smaller Companies Equity. The former was launched in February 2020 and long-term secular growth trends it is aiming to take advantage of include: ageing populations; emerging wealth; automation and supply chain efficiency; environment; consumer behaviour and data/digitalisation. The latter is pan-European, also investing in the UK, and its manager is highly experienced, with a proven track record managing small and mid-cap portfolios in Europe.
A high conviction core fund to start with is Janus Henderson European Selected Opportunities. Investing in a portfolio of 40-50 mega and large-cap stocks, it has neither a growth nor a value bias. Alternatively, Threadneedle European Select’s manager focuses on industry structure and a company’s competitive position. Firms that can defend their margins and industries with barriers to entry are preferred. A third option would be BMO European Real Estate Securities, which could add a little something extra to the line-up. It provides access to a portfolio of real estate securities listed in the UK and Europe and the managers use the full range of tools available to them, namely by shorting unfavoured stocks, to express a wider range of views and better manage risk.
In goal you could have M&G Optimal Income, with its exposure to European investment grade and peripheral European and German government bonds**, or TwentyFour Dynamic Bond which has almost 40% invested in Europe currently^. Other defensive options could come from funds that provide an income as well as capital growth such as BlackRock Continental European Income, which looks to identify undervalued European companies that offer reliable, sustainable dividends; potential dividend growth; and protection against inflation, with a lower level of risk, or LF Montanaro European Income that looks to provide a stable and growing income stream from a broad range of small and medium-sized European companies.
*Source: Investment Association net retail sales of funds by asset class, January-April 2021 inclusive
**Source: M&G, View from the Desk, 30 April 2021
^Source: Fund factsheet, 30 April 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.