The Eurozone’s crisis isn’t holding back its most dynamic companies

Philip Salter
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ALTHOUGH the slow-motion car crash of the Eurozone crisis is threatening the single currency, focusing on the monetary disaster could distract from potential income from European funds thriving from economic growth in emerging markets.

The Eurozone’s troubles won’t help the UK’s aversion towards funds invested in European equities. After all, Portugal’s bailout is just another sticking plaster on a deeper wound. In this vein, the latest Bank of America Merrill Lynch Fund Manager Survey reveals that a net eight per cent of fund managers expect the region’s economy to weaken over the next 12 months. This is a fall from a net 32 per cent expecting growth in March. Also, fund managers now see the Eurozone sovereign debt crisis as the largest tail risk globally – 36 per cent, up from 21 per cent in April. It is therefore not surprising that Coutts advises broad caution on peripheral Eurozone debt, equity markets and the euro.

However, in Europe not all countries are equal. Coutts also notes: “In contrast to peripheral countries, the finances of Scandinavian and “core” European countries such as Germany and Switzerland look solid. With less need for fiscal consolidation, we expect economic growth to be stronger in these countries.” Andy Parsons from the Share Centre believes countries such as Germany, Norway and Sweden are better positioned than those in southern Europe. On the back of global growth, companies that have been able to produce the goods and provide the services demanded by emerging markets have flourished.

The FF&P European All Cap Equity B fund currently holds 48.07 per cent of its equities in the manufacturing sector, 58.75 per cent of which is in consumer goods. While the BlackRock European Dynamic A fund holds 64.86 per cent in manufacturing stocks, with its top holdings including Switzerland’s Compagnie Financiere Richemont (4.52 per cent) and Swatch (4.26 per cent), France’s Schneider Electric (4.35 per cent) and Legrand (3.07 per cent) and Germany’s Continental (3.06 per cent). These companies are tapping into global growth.

However, investors should be aware of the currency risks. Unless the fund is hedged against it, currency movements can wipe out gains or losses. Tom Mann of Aberdeen Asset Managers explains that investors in European funds open themselves up to fluctuations – principally in euro, but also in the Swiss franc and the krone countries. Although he argues that compared to stock and sector selection, currency risks aren’t huge, Mann points out that the Norwegian krone is particularly volatile. As such, it is worth looking to see if a fund is particularly heavy on Norwegian stocks.

UK investors have on the whole been cold towards European funds. However, Andy Parsons from the Share Centre says: “Investing in companies in the European Union should provide diversification that an investment portfolio based solely on UK companies may not provide.” Adrian Lowcock of Bestinvest also thinks that Europe offers UK investors plenty of opportunity to diversify. While Alice Gaskell, co-manager of BlackRock’s Continental European Income Fund, points out: “Since 1969, dividends in Europe have grown at a rate of 6 per cent per annum, outstripping inflation.” Even if the Eurozone collapses, Europe’s world-class companies will survive this political failure.