For a Slice of the European Growth Story
If 2013 kindled your interest in the US markets, then 2014 could well be the year of the European growth story, think fund managers. Hence, the launch of a couple of European-based funds and another fund house literally changing its global investing mandate to specifically focus on the Euro land.
Does the European continent offer opportunities for you as an investor at this point? It could, if you believed that the European recovery is seeing steady progress supported by the ECB’s accommodative monetary policy to aid growth.
Prolonged contraction since 2008 may be nearing its end in the European region, what with the IMF forecasting a growth of 1.5% in the region in 2015.
Here are a few points that seem to suggest that there could be some triggers that could benefit the markets in the region:
- The IMF has stated that the Euro area economies may be moving to positive growth from recession over the next 3 years. The GDP growth of larger economies there such as UK, Germany and France are already positive. The turnaround in the continent is also captured in the markets already, with Europe equities returning 25% in 2013 (next only to US and Japan).
The region has seen an improvement in its current account balance with a pick-up in exports and contraction of imports. The ECB also took comfort from the directional change, cutting policy rate in November 2013, giving an indication of focusing on growth.
Parts of Europe can be expected to benefit from a pick up in the US economy as Europe remains a large export economy. Exports account for close to a fifth of the GDP of the European Union region. Such a proportion is high when compared with developed economies.
On the corporate side, European companies are said to have around 50% of their total revenue derived from other nations. This is higher than similar numbers for the US and provides diversification to its revenue stream.
Signs of recovery in the manufacturing space is now visible in the region, with the Purchasing Managers’ Index (PMI) moving above 50 for countries such as UK, Italy, Germany and Eurozone, indicating growth in manufacturing.
The valuation in Europe, as can be seen from the chart below, is lower than other developed and emerging regions thus providing scope for entering the market now. Also, while earnings in the region are still stabilizing, the MSCI Europe is still about 21% away from its high in 2007, unlike other markets that have crossed their earlier highs. This provides scope for the European market to gain from a rally without valuations turning expensive.
NFOs that offer the European theme
JP Morgan European Dynamic Equity Offshore Fund: This fund-of-fund will invest in its parent fund – JP Morgan Funds – Europe Dynamic Fund; the latter has been in existence since late 2000 and has delivered returns of 17.8% compounded annually in the last 5 years (returns in foreign currency).
The parent fund will invest across the region with no specific sector, market cap or regional bias. As of November 2013, this fund had a 34% exposure to UK, followed by France and Germany. As can be expected, cyclical sectors such as industrials and financials were among the top weights although the fund was underweight on financials when compared with the benchmark.
The NFO closes on January 31.
Religare Invesco Pan European Equity Fund: This will also be a fund-of-fund that will invest in Invesco Pan European Equity Fund; the latter has an asset size of about Euro 2.23 billion ( about Rs 18,922 crore). The underlying fund has about 65-75 stocks and has a large-cap bias, although it can take exposure to smaller companies. Novartis, Roche, British Petroleum are some of the top names in its portfolio.
This fund has top exposure to financials followed by industrials and consumer discretionary. UK and France are again the top holdings in this fund as well. The fund delivered about 19.2% annually in the last 5 years (in foreign currency).
The NFO closes on January 29.
DWS Top Euroland Offshore Fund: This fund-of-fund is not an NFO. Earlier called DWS Global Thematic Offshore Fund, the fund’s mandate has now changed. The FoF will invest in underlying fund – DWS Invest Top Euroland, and is available for subscription on an ongoing basis.
What should you do?
Investors may note that they would take currency risk in these investments with Euro being the dominant currency. However, it is noteworthy that the low correlation of the European market when compared with India means that the region provides a good diversifying opportunity if you already hold Indian equities.
That said, investors would do well to use these options as diversifiers as over longer periods of 10 years or more, Indian market, being an emerging one, has shown to deliver superior returns. Besides, as the Indian economy too is in a consolidation phase, any gains from here is best captured by investing locally as well. A 10% exposure may at best be what is warranted in the European market.
If you have goals such as educating your kids in Europe, then investments in such funds would be a good way to manage the currency risk. But do take an active profit booking strategy if you see high double digit returns at the end of a year or two.
Capital gains indexation benefit will be available to these funds, similar to debt funds.
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