Mark Dampier: Mad to invest in Europe? The wheels haven't all come off

 

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The Independent Online

If I asked a random set of investors about their preferred area to invest, I doubt many would currently say Europe. This is not surprising: Europe's economic environment remains challenging and its problems continue to dominate the news flow.

Many European governments are grappling with low or no growth and rising debt – this is not exclusive to the southern European countries, but is also the case with major economies such as France.

Furthermore, with a Greek election in the offing, the risk of the country leaving the euro remains. I feel it is impossible to know whether this will eventually happen – the relentless gloomy headlines seen in the press are more to do with the fact they sell better than a positive news story. In fact, I have found the majority of economic commentators have continued to be wrong-footed in their outlook.

On a positive note, the falling oil price and the weakness of the euro should be good news for many European businesses. The former will reduce costs and improve the spending power of the consumer, while the latter should help combat any deflationary effect on poorer economies as well as boost overseas sales.

Indeed, European firms are increasingly focusing on expanding into international markets. Diversifying geographically gives them the potential to survive and prosper even in difficult conditions. These companies own some of the world's most recognisable brands; extremely valuable assets which can lead to dominant market position. It also gives them pricing power, giving them control over what they charge for their products, rather than having to accept a price set by the market, and helps to protect their profit margins.

This is exactly the type of company David Dudding, manager of the Threadneedle European Select fund, actively seeks. He specifically looks for high-quality franchises operating in industries where there are barriers to entry for potential competitors.

A number of the companies held in his portfolio derive a significant proportion of their earnings from outside Europe, some of which have exposure to emerging markets where demand is rising. Stock markets across the emerging world struggled to outperform their developed world counterparts in 2013 and the fund's exposure to the region hurt performance. The past year was stronger for the fund, however, and performance has also excelled over the longer term.

One of Mr Dudding's current favoured holdings is the German auto parts manufacturer Continental. Within its specialist tyres division, he believes the company is at the forefront of cutting-edge design, which could enable the company to increase its market share over the long term. He also expects the company to benefit from increasing car sales over the longer term.

The fund is a fairly concentrated portfolio of 41 holdings. The top 10 holdings account for about 50 per cent of the fund, nine of which Mr Dudding describes as larger companies. Unusually, the fund is currently overweight in the 20 largest European companies, although in the past he has held a number of smaller companies in the portfolio and will probably do so again.

Mr Dudding expects economic growth to remain low for a considerable time – the current German 10-year bond yield of 0.7 per cent, for instance, is surely an indication of sluggish growth. He is concerned about the rise of extreme political parties in Europe, which he says is a rejection of austerity measures on the part of voters.

He believes quantitative easing (QE) should have been introduced in Europe some time ago. He expects QE will be initiated shortly and this could prove a boon for European stock markets.

It is true there is still plenty of grim news surrounding Europe, yet it is important to disconnect the outlook for the economy from the prospects for European companies. A region that is home to companies with clear dominance on a global scale is not a region that should be ignored.

Europe remains unloved, unfashionable and unwanted. As such, I believe it remains an interesting playground for the true contrarian investor.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk

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