ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

Lack of EU unity ‘drags on European equities appeal’

In response to the eurozone’s first quarter drop in growth and the European Union’s discord over how to handle migration a German fund selector has reduced European equity fund allocations.

The European Union needs to cease internal squabbling and speak with a collective voice to counter the challenge of a eurosceptic US president and an assertive China to boost the bloc’s economic prospects, according to Frank Huttel, head of portfolio management at FiNet Asset Management.

The German fund selector said the EU’s lack of unity meant he had a small allocation towards European equities, and he said he was unlikely to increase this position unless the discord ended.

“If Europe cannot stand together and be competitive against China we will lose in the future,” Huttel told Expert Investor. “Europe needs to speak with one voice.”

US president Donald Trump has repeatedly expressed his disdain for the European Union, praising the Brexit vote in the UK referendum and reportedly suggesting to French president Emmanuel Macron that France leave the union.

The president’s protectionist approach to foreign trade also risks sparking trade war with the EU.

EU leaders have been at odds about how to address migration since the election of a eurosceptic anti-immigration government in Italy earlier this year.  “The EU needs to stand as one regarding migration,” Huttel said, adding that negotiations between 28 countries will always be difficult.

Huttel said recent data – including purchasing managers’ index figures – suggested European and global growth was slowing and, as a result, he was reducing his overall allocation and becoming more defensive.

Mid-cycle slowdown

In contrast, Franklin Templeton head of European equity strategies, Dylan Ball, said the eurozone’s economic recovery was not over. GDP growth in the bloc slowed significantly in the first quarter of the year falling to 0.4% from 0.7%. But Ball said the Q1 drop in growth represented a mid-cycle slowdown rather than a slump.

Ball said that European earnings and margins tended to catch up to the US during the latter stages of the recovery.

He added that at the current stage of the eurozone’s recovery – the market would see higher bond yields and higher inflation.

“When bond yields rise, typically profitability and earnings of banks and insurance companies rise because they make money out of the steepness of curve which happens when bond yields are rising,” Ball said.

“We think investors should put political risk in the context of the equity market and we should try and focus on this inflection point in mid-cycle slowdown and look to the remainder of the cycle. In terms of where we stand – this is a very long recovery.”

Morningstar’s latest outlook report said the expected returns on European equities had improved marginally – with the best opportunities at the sector level. The report said European energy companies were appealing along with financials and telecoms.

However, Morningstar warned that profit margins at European healthcare companies remain depressed.

Looking at the first half of the year, the top European equities fund – Comgest Growth Europe Smaller Companies – returned 15.7%, according to FE Analytics.

Top performing European equity funds v sector H1Y18

Source: FE Analytics

However, for 57% of the funds returns were negative with the worst performing fund – Axxion’s PEH Q Europa – losing 9.6%.

The European equities sector within the FCA Recognised universe returned 0.05% and -0.6% for the Offshore Mutual universe during the first half of 2018.

However, over the three years to 30 June 2018 the sector returned 6.03% and 5.2% respectively.

The top fund was Axxion’s Squad European Convictions A at 71%, followed by DWB Alpha Star Aktien A at 59.7%, Comgest Growth Europe Smaller Companies at 53.1%, Comgest Growth Europe Opportunities at 46.2%, and BlackRock’s Strategic Funds European Opportunities Extension D2 at 41.6%.


Top performing European equity funds v sector three years to 30 June 2018

Source: FE Analytics

Rising interest rates

The European Central Bank is set to end its quantitative easing programme at the end of December and rate rises are expected to follow next year or in 2020.

In anticipation of rate rises, Ball said his team were avoiding companies with a lot of debt in their balance sheets.

“[By doing so] earnings growth will not be upset by rising interest costs,” he said.

Ball added that the European market’s response to rising interest rates would likely mimic the market reaction in US after the Federal reserve began raising rates in 2016.

“After the first rate hike in the US we had considerable dollar weakness which has since strengthened. Now we’re at the stage where each successive rate hike from the Fed leads to a stronger dollar relative to the euro,” he said.

“The euro is catching up and we are two to three years behind the US, so the way you made money in the US is you can actually come to Europe and make similar sorts of returns because we’re at a delay.”

Caution on Europe

Huttel noted that there were good small and mid-cap European companies that might appeal to active managers.

“I’m not a performance chaser and I’m actually reducing the fund that performed quite well,” he said.

“On the whole, I’m not really optimistic on the future of European equities even if they are cheaper than the US. There is something in my stomach that says be careful in Europe.”

Huttel said he was looking to shift money out of the developed market into emerging markets as sector was “quite cheap” for both bonds and equities.

In the equity portion of his portfolio, Huttel said the funds he liked were Arabesque Systematic R, Pictet Global Environmental Opportunities, J. Safra Sarasin Sustainable Equity Water P, and GAM Emerging Markets Equity B.

Over the three years to 30 June 2018 all the funds returned above the European equities sector average with the Arabesque Sicav returning the best at 26.8%.

Frank Huttel favourite funds performance three years to 30 June 2018

Source: FE Analytics

The top European equity funds were found using FE Analytics’ FCA Recognised and Offshore Mutual universes that were either domiciled in Luxembourg or Ireland.


  • Can M&A and buybacks breathe life into UK market?

    Can M&A and buybacks breathe life into UK market?

    Both buybacks and M&A should help realise value in UK shares, boosting prices and giving investors another reason to consider the UK stockmarket Not only does M&A activity appear to be picking up, with a high-profile bid for UK electronics retailer Currys, but the scale of company buybacks continues to accelerate. If it goes well,…

  • Capital Group launches multi-thematic Article 8 funds

    Capital Group launches multi-thematic Article 8 funds

    Capital Group has launched a set of multi-thematic sustainable funds that are available for investors in Europe, writes Christian Mayes. The Capital Group Sustainable Global Opportunities fund (LUX) will invest in global equities, while the Capital Group Sustainable Global Corporate Bond fund (LUX) will target fixed income exposure. The launch also includes a multi-asset offering…

  • Bond funds pull in €29.7bn in January – LSEG

    Bond funds pull in €29.7bn in January – LSEG

    Bond products were the best-selling asset class in January, according to LSEG Lipper’s European Fund Flow report, writes Christian Mayes. The asset class pulled in a net €29.7bn in the month, while Money Market USD grouping was the best-selling Lipper Classification after receiving €11.2bn inflows. Providers of mutual funds pulled in €22.5bn, while passives saw net…

  • Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    A quarter of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices, according to MainStreet Partners, writes Christian Mayes The 24% of funds classified as a greenwashing risk by the 2024 ESG Barometer report marks a four percentage point increase from the 20% flagged at the end of…

  • EU green rules could stymie decarbonisation projects – ExxonMobil

    EU green rules could stymie decarbonisation projects – ExxonMobil

    The European Union’s climate regulations may lead to it halting its investments in Europe, ExxonMobil has warned. Speaking to the Financial Times, Karen McKee, president of the product solutions division, said the oil and gas giant had struggled to begin decarbonisation projects in Europe due to the regulatory burden. The result, she added, was that…

  • ICE flags need for Europe to double green investment

    ICE flags need for Europe to double green investment

    Investments to modernise energy and transport must double by the end of the decade to reach 2030 climate targets, the EU has been warned. According to the Institute for Climate Economics (ICE), which has released the European Climate Investment Deficit report, the bloc lacks what it calls a “consistent tool” to ensure monitoring of the…