Don't turn from Europe because of Greek turmoil

  • @simonnread

greece may be getting all the headlines at the moment, but what of the rest of Europe? Do the financial woes of Greece – which have infected Ireland, Portugal and Spain, too – mean that investors should flee from Europe? Or should they actually be looking to the region for exciting growth opportunities?

The fact that the Greek government survived this week's confidence vote gave the markets a brief bounce, but that's all. Worries continue and a default looks on the cards, which could mean worse problems for Portugal, for instance. From an investor's point of view the uncertainty leaves the so-called PIGS (Portugal, Ireland, Greece and Spain) as no-go areas, but which countries could drive profits?

Our traffic lights guide (centre right) gives a brief indicator. But talking to European investment specialists yields plenty of suggestions of potentially exciting opportunities. For instance, Vincent Devlin, manager of the BlackRock Continental European fund, says: "Germany is one of the most attractive economies in the developed world."

His reasoning? "Germany supplies the axes and picks to the rest of the world and is a major supplier of many high-growth emerging markets such as China and India. It has recovered from the global recession at a much faster rate than other areas of the world and is economically far healthier than many other countries, with record low levels of unemployment and one of the highest growth rates in Europe." He also points out that German companies are among the most technologically advanced in the world in areas such as automobiles, machinery and engineering.

For most European fund managers, it's individual companies that are attractive, rather than countries. That means it can also be worth looking to the likes of Denmark, France, Sweden and Switzerland.

Europe can also be a good home for income seekers, says Stephanie Butcher, manager of the Invesco European Equity Income fund. "In recent years, Continental European companies have been attaching a higher priority than ever to dividends and dividend growth, to the extent that Europe now offers the highest yield in the developed market," she says.

Sam Morse, portfolio manager of Fidelity's European fund agrees. "Many European companies will grow their dividend over the next few years which indicates that they are positive on their own growth potential despite the macro issues confronting their economies."

Morse picks out Swiss food giant Nestlé. "It is successfully promoting products in emerging markets while economies of scale provide a cost advantage over competitors. These factors mean that Nestlé possesses long-term structural growth potential and is cash generative."

Aberdeen's head of UK & European Equities Jeremy Whitley believes that European equities are the cheapest in the world. "Europe is a manufacturing and technological powerhouse and has fostered the development of intellectual property," he says.

"The pharmaceuticals sector in Switzerland, the capital goods sector in Germany, and telecoms in Sweden are all cases in point, protected as they are by patents and strong brands. While sectors like French cosmetics also benefit from being seen as an arbiter of good taste by the new rich in emerging markets."

Morse also mentions the fact that many European firms generate much of their earnings outside of Europe. "For example, luxury goods companies, such as Hugo Boss, have established themselves as must-have brands in China, while heavy investment in R&D has seen a company like the insulin manufacturer Novo Nordisk become a global leader in its field with strong earnings growth."

Butcher says that it is possible to pick up well-run companies with international exposure cheaply. "Examples of that include businesses like Repsol and Telefonica (both Spanish listed) which generate a significant proportion of revenues and profits from overseas," she says.

What's clear is that strong growth opportunities remain across Europe and investors shouldn't be running scared because of the ongoing high-profile problems in Greece. But with the ongoing uncertainty, picking the right investments is more crucial than ever.

Financial fund managers look to northern Europe

Greece's problems have triggered a shakeout in the financial funds sector as managers reposition portfolios to protect against losses, writes Joe McGrath. Should Greece default the credit default swap market would explode, leaving liabilities and losses for investors.

US and German banks have the largest exposure, so financial fund managers have been moving money away from them and into Scandinavian banking groups to protect investors' cash.

As at the end of May, the Norwegian financial group DnB NOR was the second most popular stock held in financial funds' top 10 holdings after HSBC.

DnB posted strong profits for the full year of 2010 of £1.58bn, up from £789m in 2009. An ongoing cost-cutting programme, coupled with lower write-downs on loans, has made the bank appealing together with the group's dividend policy, which aims to distribute 50 per cent of profits.

Other Scandinavian holdings which have proved popular include the Nordic-Baltic banking group Swedbank and the financial group Skandinaviska Enskilda Banken.

Meanwhile, the best performing financial fund over the past year was the Sanlam Global Financial, which climbed almost 16 per cent. It's run by Kokkie Kooyman, who says he made gains by underlining his investments in the reinsurance market just before a big rally. "Towards the end of last year, we started investing more in the catastrophe insurers such as Hiscox and Amlin in England and French insurer Scor," he says. Before the rally, many reinsurers had hit historically low valuations.

Nick Brind, manager of Polar Capital's Financials (Income) fund, made nearly 8 per cent over the past year. He made good returns from the Scandinavian financial group Sampo – which was up about 20 per cent to the beginning of June, including currency.

Research from Financial Funds survey in July's 'What Investment', available next week.