Europe: Between the UK and US, Just Not Geographically

Using the Lipper Leaders scoring system to analyse the best performing funds in the IA Europe ex UK sector.

Europe is emerging from the pandemic something of a mixed bag. For example, compared to the pre-pandemic peak, the Eurozone’s GDP was at the same level, Germany was 1.5% lower and France 0.9% higher. By comparison, UK GDP in Q4 2021 was 0.4% lower, while US GDP was 3.1% higher.[1]

Equity performance is, of course, not reducible to national or regional growth rates. In these terms, it’s been a shaky start to the year for pretty much everyone. Most global equity indices had the worst January since 2008. That said, European stock markets seem to have had a relatively easy ride in contrast to the US’ Russell 1000 index—one of the worst afflicted. Information Technology has led the charge downwards, followed by the Consumer Discretionary and Healthcare sectors.

This has favoured European indices relative to much of the US. For example, the MSCI USA index has just under 30% exposure to IT. For the equivalent Europe ex UK index, that figure is a third of that. By way of comparison, the UK has about 2.5%. The best performing sector over the past year has been energy, reaping the benefits of those eye-watering gas and oil prices. Here, Europe is a touch ahead of the US, with about 3.3% exposure. The UK has three times that exposure.

So, in terms of the main drivers punishing and rewarding equity investors over recent months, Europe is betwixt the US and UK. In a period of ongoing uncertainty and volatility, with the near-term battle between value and growth no done deal but currently favouring the former, that can be a good thing.

Another positive is that European companies seem to be in relatively good shape. As of 15 February, 151 companies in the European STOXX 600 had reported earnings for Q4 2021, with almost two-thirds of these results exceeding analyst estimates. In a typical quarter 52% beat analyst EPS estimates, according to my colleagues at StarMine.

However, as this plays out over coming months, investors will likely need some exposure to European equities, so it pays to make this work for you.

Reflecting the recent turbulence, losses over three months to the end of January have been significant, to almost 20%. While most are in negative territory, a handful stood their ground, with one returning more than 5%. It’s noteworthy that, despite falling heavily over the period, Baillie Gifford European remains in the table for top-10 returns over three years. Unsurprisingly, from both a short-term return and house-style perspectives, it’s got a distinct growth style and a tech overweight. If growth returns to favour, it should benefit, but if not, it’ll likely struggle.

The top performer over three years was the IFSL Marlborough European Special Situations fund, which Lipper classifies as a European small cap fund. At year-end, it held more than 9% in cash, which will have helped dampen down the volatility that followed. It’s ranked second over 12 months and, remarkably given current conditions, also has a significant overweight to tech—although our analysis shows the portfolio to be “core” rather than growth or value. Reflecting its small cap bias, the Lipper Leader scope for capital preservation over five years is just 2. However, the consistent return score—which is the most significant calculation of risk and return—is a 5, indicating that investors have been well rewarded over the period for the risk taken.

It’s seldom a good idea to plump for funds that have shot the lights out over the past, just because they have: “past performance is no guide to the future,” and all that. But funds achieving this while mitigating the downside of style and sector biases certainly look interesting.

Table 1: Top-Performing Europe ex UK Funds Over Three Years (with a minimum five-year history)

All data as of January 31, 2022; Calculations in GBP

Source: Refinitiv Lipper

This article was originally published in Moneyfacts, p13

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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

[1] https://commonslibrary.parliament.uk/research-briefings/sn02784/