A new era dawns for investors in Europe

Sam Dunn asks whether we can all share in the EU's expansion
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The Independent Online

Europe has been off the radar in investment terms in recent months, scaring away many investors with its complex economics and sluggish growth.

Europe has been off the radar in investment terms in recent months, scaring away many investors with its complex economics and sluggish growth.

But this could all change from 1 May. Ten new members, Poland, Hungary, Cyprus, Slovakia, Malta, Slovenia, Lithuania, Estonia, Latvia and the Czech Republic will then join the EU, boosting the community of nations from 15 to 25. Easy access to cut-price labour and new markets is set to give companies across Europe more room for manoeuvre.

"There are plenty of opportunities," says Sascha Hirsch, manager of Baring European Select Growth and German Growth funds. "For example, the German tyre-maker Continental has already invested in the accession countries to take advantage of lower costs."

Baring's German fund has seen growth surge by nearly two-thirds in the past 12 months. If you had invested £1,000 in this fund a year ago, you would now be sitting on £1,634.

"The new countries coming on board should create new investment opportunities for fund managers," says Patrick Connolly, research and investment manager at independent financial adviser (IFA) John Scott & Partners.

Property markets in EU accession countries are already starting to heat up. Estate agents in Cyprus report house prices surging, with properties rarely available for less than the equivalent of £80,000.

European equities are also looking more promising. During the 12 months to 22 March, average growth in funds investing in Europe, excluding Britain, nudged 27.2 per cent, nearly matching the 28.4 per cent achieved by UK funds.

Yet while much is made of the potential benefits of expansion within the EU, the European economy continues to struggle. There are many problems, including dependence on growth in the US and Asia, a strong euro making exports expensive, high unemployment and structural difficulties such as rigid employment laws in Germany and a "one-size-fits-all" interest rate.

Interest rates remain stuck at 2 per cent despite a clamour from businesses for a cut to kick-start growth, and pressure from Chancellor Gerhard Schröder of Germany and the French Prime Minister, Jean-Pierre Raffarin. Their concerns were highlighted by their countries' economic figures: in January, Germany's unemployment rate rose for the first time since May last year, while French household spending showed signs of a sharp slowdown.

But in the midst of such gloom, reluctant investors may be overlooking a key point, says Meera Patel, senior analyst at IFA Hargreaves Lansdown.

"It's important to distance yourself from Europe and its economy," she says. "It's all about investing in individual company stocks. People have avoided the eurozone but the region is picking up - even in six months, it will still be a very good case for investment."

Ms Patel recommends the Artemis European and New Star's European growth funds. If you are prepared to put your money away for 10 years, she suggests Jupiter's Emerging European fund, one of the few that offer the opportunity to invest directly in the soon-to-be-new EU members. However, she warns that opportunities to cash in on explosive growth may already have passed.

"Bear in mind that emerging European economies - like the rest of the emerging markets around the world - have grown really rapidly in the past year," Ms Patel says. "There is a fear that you are buying at a premium when you buy into some of these companies."

John Scott & Partners' Mr Connolly agrees: "Stick with mainstream European funds," he advises. "You'll start to see accession country companies appear more and more." Among his preferred funds are Cazenove European, JPMF Europe and Gartmore European Focus.

To broaden your portfolio and invest in Europe ahead of the 5 April deadline for using up your individual savings account allowance, choose a fund that mirrors your attitude to risk. Pure equity funds will be a more adventurous choice than a distribution fund that adds bonds to spread the risk.

And remember it costs more to buy direct from the fund manager; a decent IFA will secure you a discount. If you feel confident using an online fund supermarket, the initial charge to buy into the fund can be whittled down still further.

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