After a 2016 which saw the UK quit the European Union and the US vote in Donald Trump, investors in Europe were on tenterhooks at the start of the year with four European nations going to the polls.
While elections in France, Italy and the Netherlands went as expected, Germany provided the only other real market turbulence after Angela Merkel’s ruling party took its lowest share of the vote since 1949. The result was no party taking an outright majority leading to some initial market jitters.
Yet overall, in sterling terms, over the year to 14 December the MSCI Europe Index is up 15.27%, while funds in the IA Europe ex UK have produced a sector average return of 16.66%.
The best performing fund over this time period was Alexander Darwall’s £4.9bn Jupiter European Fund, which rose 23.57%, just beating Miton European Opportunities into second place after it gained 22.03%. The Blackrock £2.7bn European Dynamic Fund, managed by Alister Hibbert, ranked third after it increased 21.35%.
To put these returns in context, the worst performing fund, of the 104 to choose from with a one-year track record, was the £86m Invesco Perpetual European Opportunities which was up 5.95%.
For the Miton European Opportunities Fund, 2017 represented a good start to life with the fund only launching in December 2015. Managed by Thomas Brown and Carlos Moreno, it has a distinct mid cap bias, with just under 60% invested in that segment of the market.
“When we launched the fund two years ago there was a lot of negativity around Europe as a whole, but as the economic and political backdrop has improved, we’ve seen a strong positive swing in sentiment to make it a darling sector,” says Brown.
“The picture keeps looking better and better, but realistically this can’t continue forever,” adds Moreno. “As we look forward to 2018, there’ll be more divergence in company performance and quality stock picking will be essential.”
Meanwhile, it was an even better year for investors in smaller companies, with the IA European Smaller Companies sector producing an average return of 22.04% year-to-date.
The best performer over this period was the T Rowe Price European Smaller Companies Fund, rising 30.66%. In second place was the Janus Henderson European Smaller Companies Fund, up 27.37%, followed in third by the Carmignac Portfolio European Entrepreneurs Fund, which increased by 25.41%.
Like the wider European sector, not one fund in the European Smaller Companies sector lost money in 2017, and illustrating how strong performance was, the worst fund – SLI Europe ex UK Smaller Companies – was still up 11.81%.
Prospects for 2018
With a more stable political landscape and a much improved economic outlook for 2018, Adrian Lowcock, investment director at Architas says the European market continues to offer value. Indeed, alongside Japan and emerging markets, Europe is one of his three markets to watch next year.
“Business and consumer confidence has been improving across the region and corporate earnings put in a strong single-digit growth in 2017 and is expected to repeat that this year,” he says. “Europe is much earlier in the economic cycle than the UK and the US and therefore the region is likely to see improvement for further GDP growth and improvements in consumer spending and corporate profits. The recovery and expansion phases of the economic cycle tend to be the phases were there is the largest movement in terms of economic growth.”
Despite this improved outlook, Lowcock says investors have remained fairly cautious, preferring to wait for the evidence before revaluing stocks. As a result, he says although markets rose they only did so to reflect the rise in earnings – valuations didn’t go up.
“Over the longer term we continue to favour mid to smaller companies which should benefit from the domestic recovery in Europe,” he adds.
Rory Bateman, head of UK & European equities at Schroders, says even after this year’s gains he continues to see good prospects for pan-European equities in 2018.
“It is hard to argue that the market is particularly cheap,” he says. “However, we think strong returns can be achieved in 2018, driven by three factors: improving corporate profit margins, lower inflation, and falling correlations.
A further piece of positive news for stock market investors, adds Bateman, is that the spectre of deflation has faded but inflation remains muted.
“This is due to several factors, including demographic changes and disruption from new technology.” he says. “We think inflation is likely to stay low, albeit higher than the ultra-low levels of a couple of years ago.”
While political worries faded in 2017, Bateman cautions politics have not gone away, as evidenced by the Catalan independence referendum and collapse of coalition talks in Germany. Italy’s elections are due by May 2018 and the UK’s Brexit talks continue.
“We would tend to see volatility around political events as a potential buying opportunity,” he says. “Political risk can often be excessively discounted, meaning that stocks can fall to valuations that do not reflect their fundamentals. This can give active managers a chance to be opportunistic and buy stocks at very attractive valuations.
“The eurozone’s economic recovery remains strong and the central bank is still providing support, albeit on a reduced basis. Moreover, political uncertainty often results in a declining euro, which is often good news for the region’s exporters.”