Prospects for the US economy are looking increasingly gloomy. The diving dollar and rapidly deteriorating property market have many investors pondering where to put their money should an America slowdown, or even recession, weigh on global growth next year. One of the best bets may be an economy many have dismissed in recent years as over-regulated and slow-growing: Europe.
Europe’s poor reputation belies the fact that its stockmarkets have been performing rather well. In fact, over the past three years, the FTSE Europe excluding UK index has returned 79%, compared to just 65% for the All-Share index. And there’s reason to feel optimistic about growth prospects for the region going ahead. Productivity in the dozen euro countries increased at an annual rate of 2.6% in the first half of 2006, according to Morgan Stanley’s Eric Chaney, while unemployment is at a five-year low of 7.9%. “The strength of the domestic recovery in Europe could act as a buffer if the global economic situation were to deteriorate,” says JP Morgan’s Ajay Gambhir.
Another reason for optimism is that “European companies are more shareholder friendly than they were five years ago”, says Fiona Hamilton in Moneywise. Corporate restructuring has been encouraged partly by the threat of “predatory interests, including huge private-equity funds”, and many analysts are optimistic that firms will “continue to benefit from strenuous cost-control”.
The two best Europe funds
So which funds should you be looking at? The sector’s top 25 funds have posted fairly high returns over the last 36 months, with those focused on mid-caps performing particularly impressively, says Investment Advisor. Mid-cap stocks usually do well at the beginning of an economic cycle, while the sector has also benefited from the mergers and acquisitions boom of the last few years. But recently there has been a move towards larger-cap stocks, reflecting a maturing of the economic cycle. One fund contributing to this trend is the £1.42bn Artemis European Growth Fund. The fund has posted a 90% return over the last three years and manager Peter Saacke sees good growth opportunities in European banks and insurance.
If you are looking for a more small-cap-focused fund, then there is Merrill Lynch’s European Dynamic Fund. Manager James McMillan tells Moneywise that the fund is more aggressively run than its large-cap contemporaries and it offers greater exposure to emerging Europe. The fund has achieved a 93% return in three years against the 75% sector average.