Today the European Central Bank (ECB) announced a continuation of its accommodative monetary policy, extending the duration of its €60 billion a month “QE” stimulus programme until at least March 2017 or until inflation reaches the ECB's target of below or close to 2%. The ECB also extended the range of assets it will purchase to include regional and local government debt, as well as cutting the deposit rate.
These measures are aimed at flushing liquidity into the system to provide further support to the Eurozone economy and to try to resurrect inflation which has evaporated in part due to tumbling commodity prices. The outlook for global growth has been deteriorating as a knock on effect from the slowdown in China and the ECB is determined that this should not derail the fragile economic recovery in the Eurozone.
Recent data has shown a rise in unemployment figures in France, the Eurozone’s second largest economy, and the latest Eurozone inflation data came in lower than expected. This meant further action today was widely expected in the markets, though many investors had hoped for more aggressive measures such as an increase in the level of the monthly QE programme rather than an extension of the timeline. Overall this news is somewhat underwhelming and the immediate reaction from the currency markets has been a strengthening in the euro, but nevertheless the policy remains a loose one.
Importantly continued loose monetary policy in Europe comes ahead of a hotly anticipated meeting of the U.S. Federal Reserve Bank (the Fed) on 16 December, which in many ways is the main game for market watchers. At this meeting it is expected that the U.S. will start moving in an altogether different direction by raising U.S. interest rates for the first time since 2006.
At a speech this week in Washington DC, Fed Chairwoman Janet Yellen delivered an upbeat assessment of the U.S. economy, expressing “confidence in a return of inflation” which is perceived as guidance that the U.S. is now ready for a higher borrowing costs (albeit any pattern of hikes might well be gradual). This would represent an important step in the process of “normalising” U.S. policy after years of ultra-low interest rates and the extraordinary stimulus measures that were implemented in the wake of the financial crisis.
While there is fierce debate over how effective QE stimulus packages have been for the real economy, where implemented they have proved supportive for stock markets and the prices of other assets (but weakened currencies), so a potential divergence in approach between the U.S. and Eurozone at this time is significant. This is one of the reasons that investors may be more upbeat about European equities than U.S. equities in the current environment notwithstanding the disappointment that the ECB didn't come up with something more punchy today.
While not at bargain prices, European shares also look less expensive than U.S. shares which have surged higher during the years of low U.S. interest rates as companies have been able to issue inexpensive debt and use this to finance the buying back of their own shares. With borrowing costs expected to nudge upwards in the U.S., this support for U.S. markets could be set to slow, meaning top line revenue growth really needs to deliver to justify current stretched valuations. Therefore, in our view European equities still have an edge over U.S. stocks.
Five funds for investing in Europe
Investors have plenty of choice when it comes to high quality European equity funds. Amongst those rated highly by our research team, here are five examples with different approaches:
This fund aims for long term capital growth by investing in small and medium sized European companies with the potential for strong profit growth but where the investment team believes the current share price does not reflect this. The fund is incredibly well diversified, with over 100 holdings, none of which represent more than 2% of the fund. Examples of holdings include Finnish telecoms firm Elisa, Kingspan Group - a global leader in insulation and energy efficient building material; and Christian Hansen which specialises in probiotics and enzymes for food, beverages and dietary supplements.
This fund, managed by specialist European equity boutique Argonaut, pursues a high conviction, “unconstrained” investment approach investing across large, medium-sized and smaller companies where the managers believe there is potential for “earnings surprises”. The fund has just 35 holdings which include corrugated paper packaging group Smurfit Kappa, Italian internet mail order business YOOX Net-a-Porter and Italian banking group Intesa Sanpaolo.
This fund is managed using a distinctive strategy that draws on “behavioural finance”. It seeks to exploit pricing opportunities created by the herding behaviour and biases of analysts and investors. The fund tends to trade stocks more regularly than a typical fund. Top holdings include healthcare companies Sanofi, Novo Nordisk and Novartis and financial services groups AXA and UBS.
This fund targets large and mid-sized European businesses with the ability to grow their dividends, where the manager believes change is happening either in the business or impacting their industry, which should prove positive. Examples include German chemical company Covestro, which was recently spun out of Bayer to become independent, and Telecom Italia which has recently seen rival firm Vivendi buying its shares.
This has long been one of our highest rated, core European equity funds. It is a concentrated portfolio of around 40 mostly larger European companies, with strong competitive advantages, recurring revenues and consistent above average earnings growth. Well recognised brands often fit this profile and constitute a large proportion of the portfolio. These include Unilever, whose diverse brands include Marmite, Wall’s ice cream, Persil and PG Tips; Richemont, whose luxury brands include Cartier, Jaeger-LeCoultre and Montblanc; and brewer Anheuser-Busch InBev which is in the midst of a mega merger with SABMiller.