The great divide
European equities is an asset class relatively
unloved by UK investors, particularly compared
with the domestic market and emerging economies.
The Greek crisis has not helped matters but there
is more to this region than the so-called ‘PIIGS’
BY DAVID BURROWS
From an investor’s perspective,
is it right to look
at Europe as one region
given the disparity between
the economies and markets
of emerging Europe,
developed Europe and the
PIIGS (Portugal, Ireland,
Italy, Greece and Spain)?
Ian Ormiston, manager
of the Ignis European
Growth Fund, argues that
to consider continents and
regions as a single homogeneous
bloc is not only
wrong but can also be dangerous
in investing terms.
“Western Europe is economically
diverse but often
we give little thought to
huge regional contrasts,
for instance between the
coastal and central states,”
he explains. “If we add the
emerging economies along
our Eastern fringe, then the
diversity is huge.”
He argues that the continuing
sovereign concerns
sweeping around Europe’s
periphery have had two
main effects: polarisation
between international and
domestic companies and a
return to the long-forgotten
art of country investing.
“As a result domestic
firms are trading at extreme
valuation discounts and
those that benefit from
global GDP growth or even
better emerging economic
growth are nearing record
high multiples,” he says.
l Country-specific
Country investing has
become important again
and Ormiston’s fund is particularly
weighted towards
German and Dutch firms
that are generally exportfocused
and benefit from
the weak euro. He has
found value in multinationals
that have been de-rated
as a result of their listing
on markets to which they
have little sales or profit
exposure, such as Ryanair
and Aryzta in Ireland.
Trygve Toraasen, fund
manager of the Thames
River Dynamic Growth
Fund, also sees problems
in taking a general view
on Europe.
He says: “Investors
tend to look at Europe
as a region and take a
pan-European view. It has
been a difficult time for
European equity markets
but as soon as things settle
a little, people will look
at regions on their own
merit and look at increasing
exposure to the emerging
European markets.”
“If you take basic financial
services, the banking
sector is well penetrated in
developed Europe but not
so much in the emerging
states. You have to look at
opportunities from these
different angles.
“There are other companies
which offer that element
of building up their
domestic profile and finally
becoming an attractive
takeover target for companies
keen to get a footprint
in emerging Europe.”
l Don’t just say ‘no’
Toraasen says that while
he is aware of individual
economic country positions,
this would not lead
to, for instance, saying no
to every possible investment
in a troubled EU
member such as Greece.
This is a point picked up
on by Kevin Lilley manager
of the Royal London
European Growth Trust.
“I am presently more
aware of country risks,
taking into account the cost
of borrowing of individual
countries,” he says. “Until
recently most bond rates
were broadly similar but if
you now compare Greek
bond yields with that of
German bonds, the difference
is significant. So in
Europe
EQUITIES EUROPE
Europe indices performance – 3 years
-50
Apr ’07 Oct Apr ’08 Oct
Source: Financial Express Analytics
Europe indices performance – 10 years
-75
’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09
1 Apr ’00 – 1 Apr ’10. Source: Financial Express Analytics
Europe indices performance
3 mths 1 year 3 years 5 years 10 years
Emerg Europe funds 7.42 110.26 -8.87 8.64 11.44
Europe ex UK funds -2.15 54.5 -7.42 4.51 1.86
M’star MSCI Europe 1.60 14.29 0.93 5.2 5.11
MSCI Eur ex UK 3.19 47.27 -10.6 0.84 -3.67
MSCI World
Source: Morningstar
2.74 49.09 -7.45 0.84 -1.74
MAY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
10
0
-10
% -20
-30
-40
50
25
0
%
-25
-50
Europe p Smaller Cos Retail
Europe ex UK Retail
Europe ex UK Retail
MSCI World
Apr ’09
MSCI World
Europe Smaller Sm maller
Cos Retail
Oct
Apr ’10
’10
49
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