Recharge your portfolio with a Euro break

It's not just flights to the Continent that are cheap right now. There's plenty of ooh la la in European shares, says Simon Hildrey

We buy second homes in Europe, rave about its food and drink, sizzle on its beaches, spend millions on short city breaks and marvel at its culture.

Yet as a place to invest our money, the Continent seems a harsh, distant land.

"We love Europe for other things, but it's a whole new matter when it comes to investing in its stock markets and funds," says Tim Cockerill of independent financial adviser (IFA) Rowan. "It is pretty unloved by the general investor, yet individual European companies will be just as good as UK ones.

"Bombardments of negative stories about Europe, along the lines of 'another crazy Brussels directive', feed through to have a general impact on investor sentiment."

Investors have certainly failed to see the attraction of European markets and funds. In March - a popular month for investing because it comes just before the end of the tax year - more cash left Europe than flowed into it in both March 2003 and March this year, according to figures from the Investment Management Association.

But we could be missing out, as European companies have become particularly cheap to buy.

Many fund managers now put the case for European stocks, rather than American ones, as a home for our individual savings account (ISA) money.

The theory is that by buying undervalued shares now, we should be able to make bigger profits later when markets realise a company's true value.

So why is Europe so cheap?

High levels of unemployment, together with stringent employment laws that make it hard to cut workforces, and a "one size fits all" interest rate have long put investors off and dampened demand.

Compare this to the United States, where, free of such shackles, companies have been able to innovate and grow fast. Not surprisingly, they have attracted investors' cash and US share prices have gone up.

This has led to an imbalance in corporate values, managers say; fresh research looking at Europe and the US suggests that continental companies can now be bought, in effect, for 30 per cent less than comparable American ones.

Average growth in European funds over the past year has outpaced that in the UK, US and Asia Pacific excluding Japan. According to the rating agency Standard & Poor's, the average fund investing in Europe has risen by between 12 and 13 per cent over the past 12 months.

Compare this to average growth in US equity funds (1.1 per cent); Asia ex-Japan (6 per cent); and UK equity (11.7 per cent). UK equity income funds (14.4 per cent) put Europe in its place, but only just.

If you had invested £1,000 in the top-performing Schroder Europe Alpha Plus fund a year ago, it would be worth a tidy £1,257 today.

Ken Cox, who manages the Templeton Europe fund, points out that European companies now show healthier balance sheets, have better cashflows and are paying down debts. Others also say that Europe now exports more goods than the US to China; and these sales are growing at a faster rate.

The 10 new countries that joined the European Union in May should provide both new markets and cheap labour.

"The profits of [European] companies will benefit from the EU's expansion," says Gary Potter of Credit Suisse. However, he and others advise caution when investing on the Continent. With the oil price above $50 a barrel, profits may not be as high as expected, warns William Davies, head of European equities at Threadneedle.

The US presidential election has added to uncertainty in global markets; steep falls in US markets are usually matched to some degree in Europe.

It is best to consider Europe as part of a balanced portfolio rather than as a "hot" investment sector - something it has never really been, says Justin Modray at IFA Bestinvest. Europe is not about investing in individual countries, he adds: "It's about companies and sectors."

The choice of these is not as wide as you might think. Funds investing in Europe number barely a third of the near 400 that invest in the UK markets.

"When people put a portfolio together, they don't think of Europe," Mr Cockerill says. "The bulk goes into the UK where they feel more comfortable - and there's no currency risk."

Europe's proximity to the UK could also be turning us off, suggests Mr Modray. "People feel they better understand investing in China and Japan, say - Europe is considered as simply more of the UK."