In recent years investors have got used to pretty grim economic headlines about Continental Europe, many of which have been around the woes of so-called ‘peripheral’ economies such as Greece, Portugal and Spain. The countries have had to impose severe austerity measures, with cuts in spending and hikes in taxation, as they grapple to deal with their debt mountains.
Yet more recently it has been some of the larger economies at the core of the Eurozone that have faced a tough time. In particular, France has endured two quarters without economic growth, unemployment is high and its unpopular socialist government has recently gone through a radical shake-up as it battles against the headwinds. Italy meanwhile is slipping into a triple-dip recession while even the powerhouse of Germany saw a surprise setback in growth in the second quarter.
However, alongside weak economic growth, the Eurozone has seen inflation tumble to levels well below the target rate of the European Central Bank (ECB) and that has caused concern. Inflation, you see, is a little like salt in food: you don’t want too much, but you do need a little.
For some time our Chief Investment officer, Gareth Lewis, has predicted that the ECB would be progressively drawn in to take bolder steps to stimulate the Eurozone financial system, if growth and inflation remained weak. Unlike other major central banks, such as the Bank of England and the US Federal Reserve, which long ago introduced major stimulus programmes, the ECB has been more reluctant to do so.
This week however, the ECB has relented, cutting Eurozone interest rates and announcing a programme to purchase asset-backed securities and covered bonds. The ECB intends that such measures will fight off the threat of deflation and that these measures should also weaken the euro, improving the competitiveness of European exports. It remains to be seen whether these measures go far enough, but the direction of travel is one of monetary easing.
In other markets, low interest rates and measures to grow the money supply have also had the effect of spurring share prices higher, and these measures should support European equities at a time when the US is winding down its own stimulus and interest rates may start to rise in the UK and US over the coming year. Although European companies have not been growing their earnings as rapidly as US or UK companies, valuations are generally cheaper.
While the Eurozone economy continues to face many challenges, it is also worth pointing out that Europe’s markets are home to many businesses that operate around the globe and therefore should not simply be seen as plays on their domestic economies or those of the Eurozone. These include the likes of Unilever and Nestlé, both of which earn significant revenues in the emerging markets, as well as world class healthcare firms such as Bayer, Novartis and Roche, and luxury brands such as L’Oréal.
The European funds that are focused primarily on larger companies which are rated highly by our research team include Threadneedle European Select, Henderson European Focus and for investors wanting a combination of income and growth, the Standard Life European Equity Income fund. For a fund focused on smaller European companies, Baring Europe Select carries our highest rating.