In the second part of our Europe special, investment experts offer some recommendations for investing in the region.

Markets

Stephen Mitchell, manager of the Jupiter Global Managed fund, focuses more on sectors than countries, however, he tips German and Swedish stocks in particular.

“In both countries, you have high quality companies, a very open economy, and high exports of capital goods,” he says.

“Recent studies published by the Swedish National Institute of Economic Research suggest Sweden in particular is weathering the storm very well – business sentiment is very healthy, and consumers are very confident.”

Sponsored

Nick Davis, manager of the Polar Capital European Income fund, sees good opportunities in Switzerland, where his fund is currently overweight. The Swiss franc has stood at a high level all year, with the prospect of further increases to come. While such a movement could potentially harm Swiss exporters, Davis is not worried.

“The country is full of innovative, high-quality companies that produce all around the world, and can still do well in the medium-term,” he explains.

“A strengthening Swiss franc is certainly not a new challenge for them to navigate.”

Other commentators see a resurgence in members of the PIGS grouping – Portugal, Ireland, Greece and Spain. Before the first quarter of the year, Italy’s economy had not grown since the second quarter of 2011, enduring a triple-dip recession in the process.

However, the country remains the world’s eighth largest economy – and the eurozone’s third – and Laurent Millet, co-manager of the Artemis European Opportunities fund, is bullish. He believes the election of Matteo Renzi’s government in February 2014 represented a major turning point.

“Renzi’s government has proven itself to be financially responsible, and instigated a number of reforms,” he says.

While Renzi’s pro-business agenda – dubbed “Sblocca Italia” (‘”Unlock Italy”) – is in its infancy, it already appears to have borne fruit; in May, Lamborghini chose to situate a new production facility in Bologna, rather than Slovakia. While GDP advances will be modest in the short-term (the economy is expected to grow by 0.6 per cent this year), the European Commission has upgraded its forecast for next year to 1.4 per cent.

Furthermore, the country’s protracted economic issues have resulted in stocks trading at a significant discount to their book value – between 20-30 per cent in some cases, Millet notes.

Reforms may have also reversed the fortunes of Spain. Mitchell notes the country now boasts one of the fastest growing economies in the eurozone, and its growth is projected to be more than 3 per cent this year.

“Considering they were on the brink of collapse in 2011, that’s great,” he says.

Millet, however, remains cautious about Spain’s prospects.

“Valuations are more expensive, and political risk is elevated – Catalonia is holding elections in September, and a general election will take place in quarter four,” he concludes.

Stocks

For Stephen Macklow-Smith and Alexander Fitzalan Howard of the JPMorgan European Investment trust, the best value is in dividend yielding stocks thanks to the region-wide upswing in earnings in recent months.

“The recently concluded second quarter earnings season saw three quarters of companies matching or beating revenues estimates, and matching or beating on earnings estimates,” the pair say.

From a sector point of view, Macklow-Smith and Fitzalan Howard are most bullish on banks. Following the Asset Quality Review initiated by the European Central Bank, banks have restructured their balance sheets and are much better capitalised.

“They have emerged as leaner machines, having disposed of non-core assets, optimised their profitability and improved cash flows,” they say.

“Many of those who received bailouts plan to re-start payment of dividends, and these plans have been approved by regulators. Great examples of this include Intesa Sanpaolo and ING.”

Other banks, such as Belgian KBC and Dutch ING, have publicly committed to reinstating dividends, or growing existing payments.

Macklow-Smith and Fitzalan Howard also see value in the insurance sector as low interest rates across the continent have served to limit the amount of capital they need to hold. This money has often been paid back to shareholders.

“An example of an insurance company we like is Munich RE,” they say.

Overall, the pair believes financial stocks of every stripe will be among the key beneficiaries of the ECB’s quantitative easing (QE) programme. QE in the US and UK produced similar results.

They also believe the telecoms space offers a number of opportunities.

“Historically the sector was comprised of highly geared, debt-laden companies but in the last few years low borrowing costs have allowed many of these companies to refinance and reduce debt levels,” they explain.

“This has helped strengthen their balance sheets and build stronger capital positions. An example of a company we like in this space is Proximus, Belgium’s largest telecommunications company.”

The stock offers a dividend yield of 4.3 per cent, and could offer strong upside –Belgium lags far behind its neighbours in respect of smartphone penetration, with 34 per cent of residents owning one. By contrast, smartphone penetration stands at 62 per cent in the UK, 55 per cent in Spain, and 42 per cent in France.

Funds

For UK investors,  finding, researching and following overseas stocks can be difficult.

“Coverage of European stocks in the national press is less extensive than UK companies. Given this, it could be beneficial to consider exposure through the use of collective investments, which have the benefit of being professionally overseen, and are generally cheaper and easier than investing directly,” says Chris Price, investment specialist at Redmayne-Bentley.

Price first tips Jupiter European Opportunities. The trust invests on a pan-European basis, incorporating continental and UK equities.

He also likes Fidelity European Values. Major holdings include Nestle, Roche, UBS and Christian Dior.

“The fund has a small percentage of its assets in UK equities as of 30 June, with the remainder held in continental Europe,” he says.

Finally, he recommends Henderson European Focus.

“The trust, launched over 40 years ago, has a bias to larger companies, but is also able to invest in mid and smaller capitalised companies.”

For the risks and rewards of investing in Europe, see part one of this special.

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