How to invest in European stock markets
In the shadow of the sovereign debt crisis and Britain’s EU divorce, European stock markets are still enticing investors, and with good reason. The MSCI Europe ex-UK index has returned a respectable 12.6% over the last three years, while the average fund in the Investment Association’s Europe ex-UK sector delivered 48.4% over that time.
European stocks look cheap at current levels, trading on valuations below their long-term averages, and companies are performing well. In the first quarter of the year, two thirds reported earnings that beat expectations.
There could be bargains in Europe for investors willing to look past the political uncertainty ahead. Here are some of the ways you can tap into the European recovery.
Continental Europe boasts some of the highest quality companies in the world, with leading pharmaceutical companies, car makers, telecoms giants, banks and insurers all listed on its markets. The banks, in particular, have had a rough ride since the financial crisis in 2008, but the banking system seems to have been stabilised in many countries. There have been other crises, such as the diesel engine scandal at Volkswagen, but large swathes of corporate Europe have been doing very nicely in recent years. As with all stock investing, there are risks, so do your research, pick a diversified portfolio and rebalance regularly.
If you want to buy and sell shares in some of Europe’s biggest names or its smaller, undiscovered gems, you could do so through a stock broker. Another option is to open an online share dealing account, where you can build a portfolio quickly and typically at lower cost. Many trading platforms allow you to place deals easily, and some let you monitor the performance of your holdings in real time on your smartphone. Check the charging structure of your chosen platform as many will charge per trade. Some will place a monthly cap on trading costs but others won’t.
ETFs and index trackers
Index trackers or exchange traded funds (ETFs) can be a low-cost way of getting exposure to European equities. They work by replicating the performance of major markets using a passively managed fund. Typically they cost much less than an active fund.
There is an ongoing price war among passive fund providers, so investors can now buy ETFs tracking developed market indices for as little as five basis points. The main difference between ETFs and index trackers is that an ETF is traded on an exchange, like a stock, so it can be bought and sold quickly, while an index tracker is more like an investment fund and is priced once a day.
Morningstar reports that European equity ETFs are the best performers year to date, out of the top-rated ETF universe it covers.
You can see Europe-related ETFs in our ETF screener.
There is a wealth of choice if you want to dip a toe into Europe by investing through a fund. Most generalist fund houses will have at least one fund offering exposure to the Continent. When you outsource stock selection to an experienced manager, you benefit from the asset management firm’s research resources, which may include analysts on the ground in different European countries. Fund managers often meet the management teams of the companies they hold so they can quiz them face to face. This is what the management fee pays for, as well as the dealing costs you would incur if you were buying and selling stocks yourself.
Among the top performing funds in the Europe ex-UK sector over the last three years were Man GLG Continental European Growth, Marlborough European Multi-Cap and CRUX Special Situations. Even among this handful of funds, there is a range of different investments, from a focus on niche businesses or recovery stories to fast growing emerging winners, or a multi-cap approach which takes in the whole spectrum from small to mega-cap companies. It’s great to have this choice, but you should make sure that the funds you select reflect your tolerance for risk, because investments can go down as well as up. Consider taking financial advice before making any decisions. You also need to ensure you really do get the outperformance you are paying for.
Where next for Europe?
Europe’s economic recovery is gradually picking up steam, but there are still risks on the horizon. The debt crisis remains unresolved, and Greece is still the weak link in the European Union. Of course, the Union will be placed under further stress by Britain’s exit, but no one is sure yet how this will play out. Germany, where Angela Merkel looks set to win another term as chancellor, and France, seem to have put renewed vigour into the European project. The European Central Bank’s (ECB) efforts to stabilise the eurozone economy appears to be belatedly working, particularly as the threat of deflation as subsided.