IN FOCUS
/ SECTOR PROFILE /
BACK TO THE
DRAWING BOARD
Europe was being
heavily tipped by
fund managers at
the start of 2015, but
it has flattered to
deceive since then.
Daniel Lanyon looks
at whether it can
reach escape velocity
Investors who put
their money to work in
Europe in 2015 believed
Draghi’s economic stimulus
measures would push up the
value of asset prices and drive
healthy returns for stock markets.
And this is exactly what
happened – to start with. Equities in
the region rocketed, with the FTSE
Europe ex UK index gaining nearly
16 per cent in the first quarter of
2015, vastly ahead of the US and
UK, with Japan – riding high on
its own wave of QE – the only
developed market to beat it.
F
lashback 12 months
and despite a host of
worries about “Grexit”,
worryingly low
inflation and sluggish
economic growth, many investors
were feeling bullish on the
prospects for European equity
funds. Today with Brexit now chief
among many UK investors’
concerns and returns in the region
muted in 2016 so far, that
confidence seems to have near
vanished.
In the first half of last year, cash
flooded into European funds as
investors rushed to gain exposure
following the unveiling of
quantitative easing (QE) in January
2016 by the European Central
Bank (ECB) in a bid to stimulate
markets. Its president Mario Draghi
unwrapped his “big bazooka”
and aimed it squarely at financial
markets, which loved it.
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INVESTOR FRENZY
Unsurprisingly, the IA Europe ex
UK sector also rallied, rising 9.27
per cent, with every one of its 102
members finishing 2015 in positive
territory. Best of all was Rory Powe’s
Man GLG Continental European
Growth fund, which netted more
than 30 per cent after fees.
It wasn’t just the macroeconomics
that had investors in a frenzy. An
ongoing fall in the price of oil
also looked set to boost consumer
demand – the EU imports more
of the commodity than any other
region in the world – while a
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Switzerland,
the wealthiest
country per
capita on the
continent, is
not a member
of the EU
weakened euro was expected to help
the continent’s many exporters.
There was also a strong belief the
US stock market was overheating
and had begun to look expensive,
meaning Europe represented better
value for the next leg of the post-
crisis recovery.
While none of these factors have
materially changed, the hopes and
expectations of the bulls have been
dashed – or at least put on hold,
according to Adrian Lowcock, head
of investing at AXA Wealth.
“The initial euphoria last year
didn’t last as concerns over Greece
returned, followed by China, and
drove a sell-off in markets. The
global outlook has deteriorated
significantly over the past 12
months as investors have become
increasingly concerned over
Chinese growth, among other
things,” he said.
FALLING RISK APPETITE
Europe funds and the wider market
have spent the time between April
2015 and February 2016 losing their
initial gains. They recently started
to recover after Draghi revamped
his QE strategy with the addition of
negative interest rates – however,
85 per cent of funds in the sector are
still down since April 2015.
The falling appetite for risk
has made 2016 a tough year for
investors in most equity markets,
with the FTSE Europe ex UK index
and IA Europe ex UK sector up
just 1.6 per cent and 0.03 per cent,
respectively.
Rob Morgan, pensions and
investment analyst at Charles
Stanley Direct, says that while the
market seems unconvinced, the
investment case that saw so many
people get so excited about Europe
last year remains in place.
“Their logic was reasonable.
Valuations were cheaper than in
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