In 2023, a survey of 2,000 adults by Jet2Holidays – the UK’s largest tour operator – revealed that all the top ten holiday destinations for Britons travelling abroad were in Europe. Italy, Greece, and Spain topped the list of countries offering sun, sea, and sand to weather-weary holiday makers.
However, the Continent is one of the least favourite destinations for British investors. Over five years to 2023, a whopping £11 billion was withdrawn from European equity funds *. Are Brits right to be shunning the shares of our nearest neighbour? Or are we missing out on opportunities?
Investment opportunities in European equities
First and foremost it’s important to remember that Europe is a big place – it’s home to 50 countries and thousands of companies. So the choice is huge for investors.
It’s also important to remember that while many companies will be reliant on local markets and economies doing well, as Niall Gallagher, manager of GAM Star Continental European Equity points out, “more than half of the profits and revenues of European companies now come from outside Europe.” Many, instead, come from Asia and, in particular, China.
Europe is 7000 km (or 4349 miles) away from China, but the Asian giant’s economic impact on the Continent is significant. The Chinese are big consumers of European apparel, sporting, and luxury goods.
Europe is also set to benefit from long-term trends including China’s spending on their buoyant electric vehicle industry, which will provide more opportunities for European auto component and technology providers. The Continent is also set to benefit from the major new tailwind that is artificial intelligence, and it’s requirement for semiconductors.
According to Giles Rothbarth, manager of BlackRock European Dynamic fund, trends such as this make the 2020s “an exciting time to be investing in European equities given the breadth of opportunities available”. Europe’s wafer fabrication equipment manufacturers (which make semiconductor products) have extremely dominant market positions, high and improving margins, and technological expertise that is almost impossible to replicate. “This in an industry that is expected to double in size over the next decade,” Giles says.
Europe is also home to many of the world’s leading companies whose products and services are critical for decarbonisation. These companies range from those at the forefront of innovation in green hydrogen, to industrial automation, construction materials and electric vehicle infrastructure. With trillions of dollars being spent in these areas, these companies are extremely well positioned.
Finally, Europe also has a vibrant industrial base offering a plethora of high-quality manufactured goods and components and chemicals, as well a world-class med-tech and healthcare sectors.
So how can you invest in European equities?
One way to invest in European equities is to buy shares in the companies. But although the European equity market is half the size of the US, it has more than ten times as many stock exchanges.
So a simpler way is to invest via a European investment fund. European investment funds pool together the money of lots of people and invest the proceeds in the shares of various firms listed on the different European stock exchanges. This diversification helps reduce the impact of individual company, sector, or country-specific risks.
What are the risks of investing in Europe?
Speaking of risks, investors in European equities do need to consider them, because the value of your investment can go down as well as up! European equities – like all equities – are exposed to economic conditions and political developments. Factors such as economic growth, inflation, currency fluctuations, political stability, and investor sentiment can all influence the performance of European equity funds.
Four European equity funds to consider
- CT European Select fund invests predominantly large European companies. It has a distinctive process, developed over a number of years, that focuses on industry structure and a company’s competitive position. Firms that can defend their margins, and industries with barriers to entry are preferred.
- IFSL Marlborough European Special Situations invests in European businesses of all sizes but focuses on the continent’s minnows. It is managed by Hargreave Hale, one of the UK’s most experienced smaller companies teams, and is a true stock picker’s fund with the team scouring the market for under-the-radar opportunities.
- LF Montanaro European Income fund focuses on small and medium-sized businesses in Europe, which offers a huge choice of investments that are under-researched by the wider market. Each holding will also offer an attractive dividend yield, or the potential for dividend growth.
- Janus Henderson European Focus typically invests in just 30 to 40 stocks, but is still well-diversified, with a framework that is driven by both sector themes and stock specifics. The fund mixes blue-chip holdings with medium-sized companies and the manager’s pragmatic approach means he considers the overall macroeconomic environment and sector trends, as well as the criteria of individual companies.
*Source: Investment Association, net retail sales of equity funds by region, April 2023
