Are European stock markets ready to start motoring?

Slow growth in Europe, says Iain Morse has masked some good opportunities

Whatever happened to Europe? In the late Nineties, European unit trusts were top performers but have since lagged behind UK ones. And the economic news from France and Germany is lacklustre. Last week, German unemployment topped five million, out of the 38 million eligible to work, the highest total since 1933, and French unemployment is running at 10 per cent. Growth in the big European economies is low, and labour market reform slow.

Whatever happened to Europe? In the late Nineties, European unit trusts were top performers but have since lagged behind UK ones. And the economic news from France and Germany is lacklustre. Last week, German unemployment topped five million, out of the 38 million eligible to work, the highest total since 1933, and French unemployment is running at 10 per cent. Growth in the big European economies is low, and labour market reform slow.

"This may be true, but the valuations put on many European equities currently make them look cheap by comparison with UK or US equivalents," opines Dino Fuschillo, a European fund manager at Martin Currie Investment Management. Large-cap European shares, including multi- nationals, are valued at an average of 12 times estimated earnings for 2005. And there is room for further rationalisation in the single-currency zone.

"Merger and acquisition, the formation of new Europe-wide companies will continue," he adds, "and this creates opportunities for investors."

Despite low economic growth in the main euro-zone economies, many companies are enjoying high free cash flows. Why are these important? "They allow companies to reward their shareholders," says Stewart Fraser, director of European equities at Standard Life, "to buy back stocks and strengthen balance sheets." Free cash flows are calculated by deducting a company's capital expenditure from its operating cash flow, much of which should be made up from the company's sales. All that free cash has resulted in an average dividend yield of 2.8 per cent from the 500 largest companies in the FTSE Europe (ex UK) Index. This dividend level is higher than the interest rate set by the European Central Bank, which remains at just 2 per cent. "In other words," Fraser adds, "investors can get a high yield and the prospect of capital growth by buying equities." But both Fuschillo and Fraser agree on the need for careful stock picking in these markets.

There are also broader, longer-term arguments for Europe. They spring from the dramatic process of equitisation of the last 10 years. Equitisation is the process by which privately owned companies come to be listed in stock exchanges accounting for a larger and larger share of a country's real economy. Measured over 10 years, to the end of 2004, the market value of UK equities grew from 87 per cent of GDP, to 125 per cent, with the excess 25 per cent accounted for in part by the value of non-UK assets owned by British companies. Meanwhile, in Germany, Europe's largest economy, the same figure for 1994 was 18.3 per cent, increasing to just 38 per cent by the end of 2004. But change elsewhere has been more dramatic. In France, the same ratio increased from 23.9 per cent to 66 per cent; in Italy, from 14 per cent to 42.8 per cent; and in Spain from 21.9 per cent to 60.3 per cent.

"After allowing for share- price bubbles and the like, these figures tell a very persuasive story," says Tony Dolphin, chief economist at Henderson Global Investors. "Europe still has some way to go in equitising assets, and this should provide many investment opportunities." The theory behind this is that undervalued private companies will be sold off to public shareholders, releasing huge value in European mid- and large-cap companies. "The prospect to cheer investors is that of being able to buy shares at less than their long-term value," he adds.

But, as always, there's a catch. Economists are revising their euro-zone growth forecasts down. The consensus for 2005 is 1.7 per cent, much the same as for 2004. Stronger figures were expected but the strong euro, at its highest level against the US dollar for years, is choking off exports. If, however, you are convinced about Europe's prospects, the easy way to invest in it is through a retail fund.As usual, investors face the headache of choosing an out- performing fund. There are 104 in the sector. The best-performing, Schroders' Europe Income, grew by 20 per cent in a year. The worst, F&C's European Prime, grew a paltry 4.8 per cent. European Smaller Company funds fared much better. There are only 14 in this sector, but average growth was 24.7 per cent. The best, Schroders' European Smaller Companies, grew 31.6 per cent.

There are fewer investment trusts investing in European mid- and large-cap stocks, nine in all, but their performance has been strong, with the poorest, Charter Pan-European growing its share price by 20 per cent. The best, Fidelity's European Values trust, has returned a one-year 38 per cent share-price rise, and a 370 per cent rise over 10 years. This trust used to be managed by Anthony Bolton, who still runs Fidelity's successful Special Situations trust, and Bolton-trained current manager Tim McCarron.

Next come five trusts that make up the European Smaller Companies investment-trusts sector. In 2004, these returned an average 39 per cent, with the poorest performer, Henderson European Micro, increasing its share price by 31 per cent. The top performer, TR European Growth, was up 44 per cent. And investors seeking exposure to European private equity might consider Standard Life's Private Equity trust, up by 15 per cent for the year.

So, slow growth or not, there are certainly investment opportunities in Europe.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
News
i100

Other places that have held independence referendums
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
PROMOTED VIDEO
News
news

Sport
footballThe latest scores and Twitter updates from tonight’s games, featuring Bayern Munich vs Man City and Chelsea vs Schalke
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
News
peopleThe Times of India said actress should treat it as a 'compliment'
Arts and Entertainment
Jack Huston is the new Ben-Hur
film

It scooped up an unprecedented 11 Academy Awards when it was first remade in 1959

News
news

Watch this commuter wage a one-man war against the Circle Line
Property
Home body: Badger stays safe indoors
lifeShould we feel guilty about keeping cats inside?
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Arts and Entertainment
Maxine Peake plays Hamlet at Manchester's Royal Exchange
theatreReview: Maxine Peake brings emotional ferocity to Shakespeare's starring part
Extras
10 best table lamps
indybest
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week