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Europe in meltdown? No – and this is why some professional investors are buying

by International Commercial Investment on August 24, 2015

Despite China and Greece, fund managers say there are good reasons why European shares will rise.

At the start of 2015 professional investors tipped Europe as the ultimate bet against the crowd, but nearly three quarters of the way through the year the party has not got into full swing.

Far from it: one of the key Continental indices, the German Dax, is down 12pc in just three months.

Initial optimism was hinged on the expectation at the European Central Bank would embark on a money printing programme, known as “QE”, in a bid to stimulate the continent’s sluggish economic growth.

However controversial and questionable the policy, as far as investors are concerned one thing is clear – stock markets tend to benefit.

America, Britain and Japan all saw shares rise strongly during their past and present (in the case of Japan) “QE” policies.

In March billions of new European notes were “printed”, as QE was set in motion, but so far the expected lift in Eurozone stocks has not materialised.

• European shares suffer biggest weekly fall this year

Since March 10, when QE began, the EURO STOXX 50 index, viewed as the benchmark index for European shares, has posted a small loss of 2pc, with investor sentiment soured by the latest debt crisis in Greece and now weighed down by anxiety over China’s slowdown.

So far this year, however, the index has fared better, returning 10pc. With the latest Greek bail-out agreed, professional investors argue it is time to buy before stock markets “take off”.

Dylan Ball, who manages the Templeton Growth fund, told Telegraph Money why his confidence remains high: “The region has been in the headlines for all the wrong reasons and sentiment did take a knock when Greece was teetering on the edge of leaving the single currency. This has stopped the market taking off and I am betting on this reversing from now until the end of the year, as QE is eventually going to have an impact and send share prices higher.”

A number of respected multi-managers, whose job is to form a broad view of the best mix of assets and then subcontract detailed portfolio decisions out to specialist fund managers, have also been increasing their European exposure. These include Jupiter’s investment chief, John Chatfeild-Roberts, who runs the Jupiter Merlin fund range, overseeing £9.5bn in savings.

Ben Willis, of wealth manager Whitechurch Securities, also thinks now is the time to buy.

He said: “As the dust settles on the Greek situation and QE in Europe begins to take shape, business confidence will improve, whilst a weak euro will provide impetus for exports. The recent obsession with Greece could provide some contrarian buying opportunities and so Europe remains one of our favoured regions over the medium term.

“China is of course a big concern, but I think the European recovery is a domestic story and will be driven more by increased consumer spending. Some international business and Germany in particular may suffer in the short term, but investors need to be brave and accept that there will be some volatility along the way.”

Here are three smarter ways to profit.

1. Buy a fund that has loaded up on ‘cyclical shares’

“Cyclical shares” are closely aligned with the economy and will therefore benefit from an uptick in consumer spending.

Garry Potter, who buys funds for F&C Investments, suggested Neptune European Opportunities, which favours shares in companies that sell discretionary items. One of the fund’s biggest bets is SABMiller, the global beer and soft drinks business that owns Peroni and Castle lagers, among other brands.

Jason Hollands, who works for Tilney Bestinvest, the adviser, tipped Threadneedle Europe Select. “It has an emphasis on larger companies with strong brands, competitive advantages and resilient earnings,” Mr Hollands said.

Top holdings include L’Oréal and Anheuser-Busch InBev, which brews Budweiser.

Darius McDermott, of FundCalibre, a fund raring website, named Jupiter European and BlackRock European Dynamic as two funds that he is backing to benefit more than others.

2. Just stick to Germany

Another but more riskier option, Mr McDermott suggested, is to put all your eggs in the one country that stands to benefit most from a revival taking place – Germany.

Since the turn of the year the euro has depreciated significantly, falling around 10pc again the pound.

The weaker currency benefits exporters, so therefore Germany, with its manufacturing and export-led economy, stands to benefit, even given a fall in the rate of China’s growth, which has spooked the German stock market in recent months, with its blue-chip DAX index, down 12pc over the past three months.

Mr McDermott said Baring German Growth is the only single-country active fund available to investors, costing 0.82pc a year.

Investors who want a cheaper deal should instead consider a tracker fund, which will follow the up and down movements of the German stock market, such as iShares MSCI Germany ETF, which charges 0.48pc.

“Crucially, the largest German export companies are listed on the German stock exchange so an investor in German equities is getting direct exposure to that export growth,” Mr McDermott said.

3. Protect yourself against further euro falls

For those who are concerned about backing a losing currency it makes sense to eliminate this risk and settle for the same investment return on an overseas market as local savers.

The way to do this is to buy a special version of a fund that “hedges” against currency movements. Unfortunately, relatively few European funds offer a hedged share class.

Among the ones that do are Artemis European Opportunities Hedged and JPM Europe Dynamic Hedged. Both these funds are “suitable options”, according to Mr Hollands.

“To give you an idea of how the currency hedge has boosted returns, over the last 12 months the hedged version of the JPM fund is up 22pc, versus 10pc on the unhedged. Likewise for Artemis, the hedged version is up 22pc versus 13pc on the traditional version,” Mr Hollands said.

“From here however, given the steep depreciation in the euro, the case for currency hedging is more balanced that it was several months ago, but is still a useful tactic. I am personally now half exposed to currency hedged European funds and half unhedged.”

International Commercial InvestmentEurope in meltdown? No – and this is why some professional investors are buying