Hedging currency exposure will be a saving grace.
The Euro had a bumpy ride economically last year, and most don’t expect 2015 to bring much respite. Anaemic growth, credit contraction and a very real fear of a deflationary spiral (the inflation rate fell to -0.2 per cent in December) are fuelling mounting expectations of QE. And economic woes have only been added to by burgeoning political risks: the possibility that, led by far-left party Syriza, Greece will exit the Eurozone, giving heart to populist parties elsewhere in the region.
But despite the poor backdrop, many in the investment industry remain sanguine. “Europe is home to many successful businesses with global earnings, and prices look relatively attractive by historical standards if you look at long-term valuation measures,” says Hargreaves Lansdown’s Laith Khalaf. Alberto Chiandetti, portfolio manager of the Fidelity European Opportunities Fund, adds that European firms that generate the majority of revenues outside of the region are really benefitting from a strong dollar. Moreover, falling oil prices and the healthy US consumer are both acting as bolsters, he says.
So how can investors access the pockets of value in this turbulent market?
TAKE THE LONG VIEW
The first thing to note, says Khalaf, is that “anyone investing in the Eurozone needs to take a longer view than just 2015”. The European Central Bank’s (ECB) decision on whether to engage in QE will have a “binary result” for the markets in the short term, he points out – if it happens, they’ll react positively, and vice versa if not.
With this in mind, funds that focus on firms that’ll do well in prevailing conditions are one good option: “investors looking for exposure might consider Sanditon European, run by Chris Rice, who combines economic and stock analysis,” says Khalaf.
For investment group Tilney Bestinvest, near-inevitable QE makes Europe a top pick this year. Managing director Jason Hollands explains that the last few years have taught investors that there is money to be made following massive central bank stimulus programmes, which supercharge equities.
But it’s absolutely vital to remember the flip side, he stresses: you must hedge the currency exposure – the euro is already sliding against other benchmark currencies in anticipation of QE.
Further, as the year progresses, says Hollands, it’s very possible we’ll see “a real disparity” between those central banks walking away from printing money, and the ECB, which is walking very much towards it. The upshot is that “many asset allocators are minded to follow the flow of new cash [from central banks], rather than countries with more robust economic fundamentals.” Japan is something of a bellwether here – this approach has worked well there over the last two years.
That said, the fund management industry has been slower off the mark when it comes to offering currency hedged versions of their European equity funds, says Hollands. One he would recommend, however, is the Artemis European Opportunities Hedged fund, where the traditional fund’s one-year return of 1 per cent has been trumped by the 7 per cent made on the currency hedged version.
NOT ALL ABOUT WINNING
Another way to approach European markets this year, says Fidelity’s Paras Anand, is to move away from the mindset of winning and losing sectors. “An area of potential positive surprise could be corporate renewal,” he says. Businesses that are making considerable changes in order to unlock latent value for shareholders exist across the market.
The greatest scope, he adds, is “among the larger groups with diverse business portfolios or a broad geographical spread that are looking to bring greater focus”. Firms currently doing this include Siemens, Bayer, GlaxoSmithKline and Akzo Nobel. The level of change is complex, says Anand – but “the benefits could be lasting and material”.