It has been a tough decade for Europe on both the political and economic fronts. The global financial crisis and European debt crisis had significant knock on effects for the countries in Europe and political events such as the Brexit vote in 2016 led to uncertainty in the area. However, Europe is starting to prosper again. Let’s take a look at how/why money has flowed towards Europe recently. We’ll look at the IA Europe Excluding UK sector and, in anticipation of the fast approaching FE Alpha Manager Awards, will look at a selection of FE Alpha Manager award nominees with exposure to Europe.
The impact of the European Debt Crisis, a multi-year debt crisis that has been taking place in the European Union since the end of 2009, has had several effects, one of them being the lowering of European market valuations. Political and economic crises across the continent in countries such as Greece and Spain, meant that the recovery after the global financial crisis stalled significantly, and there was far too much uncertainty for investors to take advantage of these low valuations.
It took the Brexit referendum in June 2016 and the resulting ‘leave’ outcome for the wheels of change to start turning. Due to the uncertainty surrounding Brexit, which still exists today, and the ensuing sense of shock felt by people in all corners of Europe, this was probably the first time that investors globally started to distinguish between the UK and the rest of Europe and were forced to reconsidering whether the UK is the best place to invest their money. There was simply a stark difference in confidence between the UK and Europe which directed the flow away from the UK.
The significant catalyst for change and when things began to calm down was Emmanuel Macron’s victory in the French presidential election early in 2017, as this provided reassurance to the markets. The German and Dutch elections also helped to restore confidence at a crucial time given that the election of President Trump had shocked the world.
We spoke to FE research manager, Charles Younes, to get his thoughts on the matter.
“Following the financial crisis of 2008, European markets struggled, with each country having their own particular economic disasters to deal with. However, 2017 was somewhat of a turning point. General elections across Europe gave confidence to consumers and businesses, particularly that which saw Emmanuel Macron elected as French President. From that point onwards, Europe’s economy gained momentum and has recorded a significantly stronger level of growth to date.”
Key indicators suggest that this confidence in Europe has been maintained and looks set to remain at higher levels due to the fact that the European market is growing at pace, as well as the fact that it’s at the beginning of its business cycle meaning there is still time for expansion.
Tanvi Kandlur, fund analyst at FE explains why business confidence is high in Europe: “After multiple years of downgrades, European earnings finally showed growth in 2017. Corporate profit margins are also around 30% below their 2006 levels so there is room for expansion. Meanwhile productivity of corporates is improving after multiple years of weakness which provides reassurance that profit expansion can continue.”
What does the data say?
The FE Analytics Market Intelligence (MI) tool shows that between March 2016 to March 2017, just three funds from the IA Europe Excluding UK sector featured in the top 100 most researched funds from the Investment Association Universe; Jupiter European fund, the Blackrock European Dynamic fund and Blackrock Continental European Income fund. Meanwhile, between March 2017 and March 2018 the number of funds from the IA Europe Excluding UK sector had more than doubled from three to seven, suggesting that the sector really is one place investors are turning to.
Furthermore, by looking at the FE market movements tool within FE Analytics, we can see the top 20 funds from the IA Europe excluding UK sector ranked in order of money (£m) flowing into funds for the last year.
The net inflow for this sector over the last year was £6109m. Compare this to the IA UK Equity Income sector and the difference is stark, with a net inflow of £-874m. This demonstrates just how popular the Europe excluding UK market has become.
FE Alpha Manager Award nominated managers
Of the top 20 funds, two are managed by managers who have been nominated for FE’s Alpha Manager Awards; Alexander Darwell and Alister Hibbert who manage the Jupiter European fund and Blackrock European Dynamic fund respectively. Both funds have earned their nomination for different reasons, but both have a Europe excluding UK stance and have achieved success through the good and the bad times of the last decade.
Tanvi Kandlur explains the connection of these managers to Europe and why they have been nominated:
“Alexander Darwall boasts of a strong track record in European equities. Darwall’s nomination in the “best bear” category is backed up by his proven ability to protect investors’ capital in down markets such as 2008 and 2011 - exactly the time periods already mentioned as being some of the most critical that Europe has suffered. However, he has also captured all the upside in up markets such as 2009, 2010 and 2017.
“Alister Hibbert’s fund has historically added the most value relative to its benchmark in rising markets such as 2009, 2010, 2012 and 2017 justifying his nomination in the “best regional equity specialist” category at the FE Alpha Manager Awards. It is a punchy strategy led by the European team at BlackRock, and this has been reflected by a high sensitivity to the European market."
Performance justifies the switch
Lastly, FE data shows that the move to the Europe excluding UK market paid off for investors. The chart below shows the performance of the IA Europe excluding UK sector compared to the UK Equity Income and UK All Companies sectors over the past three years.
This graph also highlights exactly the point at which the IA Europe Excluding UK sector really starts to push away from the IA UK All companies and IA UK Equity Income sectors (early 2017), reflecting the period of time in Europe that the uncertainty of last decade started to calm down.
In summary, the last decade has been a tumultuous one for both European and UK markets for a number of reasons. There has been a shift of money towards the Europe excluding UK market, and it still has room to expand with corporate profit margins being around 30% below their 2006 levels. Interestingly, whilst the problems of the last 10 years or so were set in motion by financial factors, it seems that the improvement in European markets and distinction between the UK and Europe for the first time by global investors, has been brought about largely by political issues.
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