Richard Troue: 'Away from the headlines, the outlook for European companies is improving'

Many cut costs in the wake of the financial crisis and have emerged leaner and more efficient

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If I mention Europe, the first three words to come to mind are probably Greece, debt, and crisis. Indeed, as I write, the Greek saga has once again made the front page of the Financial Times as a deal between the debt-laden country and its creditors is apparently "close".

The precarious situation in which Greece finds itself has sent shockwaves waves through European stock markets this summer and will probably do so again in future. For now at least, it looks likely the country will remain in the eurozone.

With the storm clouds clearing it could be a good time to step back and look at the bigger picture. Short-term setbacks often provide opportunities, and the outlook for European companies isn't as bad as some headlines imply.

Business confidence is improving and lending is on the rise again, providing small and medium-sized companies in particular with much-needed access to finance. Unemployment has started to fall and is at a three-year low, while wage growth has also turned positive – earnings grew 2.2 per cent in the first quarter of the year. Meanwhile, inflation has hit 1 per cent, meaning a Japan-style slump into deflation is less likely, and as long as wage growth continues to outpace inflation consumers will feel better off.

This bodes well for European companies. Many cut costs to the bone in the wake of the financial crisis and have emerged leaner and more efficient. Retail sales and consumer spending have started to pick up, and with fewer costs to cover, this should feed through to profits.

Companies with overseas sales should also feel encouraged. The US recovery continues to strengthen while the UK economy is also in reasonable shape. Longer-term there is a tremendous opportunity to capture continued growth in emerging economies, although admittedly the near-term outlook is more muted.

The improving backdrop has already started to feed through to company earnings. The first quarter of 2015 saw many companies surprise on the upside and revisions have subsequently turned positive for the first time since 2011.

This all bodes well for European stock markets. If earnings growth continues, share prices should ultimately follow.

When it comes to funds investing in Europe, Legal & General European Index provides a straightforward and cost-effective way to access the market. It aims to track the FTSE World Index – Europe ex UK, and since launch it has tracked its benchmark tightly. Annual charges are competitive at 0.09 per cent.

For an actively managed approach, aiming to beat rather than track the performance of the same index, the TM Sanditon European Fund could be worthy of consideration. Chris Rice, the fund's manager, has invested in European companies since 1992 and has built an excellent track record over this time. In 2014 he took the opportunity to set up his own investment company and launched the Sanditon fund last September.

Mr Rice uses a business cycle approach to investing, reflecting his view that economic activity fluctuates around a long-term trend. He aims to identify when the next stage of the cycle will arrive and the types of companies that will prosper, before positioning the portfolio accordingly.

The fund is currently set up to benefit from the accelerating growth of domestic-facing consumer businesses and is biased towards economies which have recently struggled but are showing signs of a turnaround, such as Spain, Italy and France.

In Spain, Chris Rice expects further earning upgrades for the media firm Atresmedia, and NH Hotels, as both have been performing well recently. Elsewhere, the earnings strength of other consumer-focused stocks, such as French hypermarket Carrefour, has been less strong, but he views valuations as attractive and is willing to be patient.

There are clearly still risks of further volatility and the Greek crisis could rear its head again in the future. However, with the outlook across much of the rest of Europe improving and valuations looking inexpensive, I would be tempted to use any stock market dips to top-up exposure.

Richard Troue is head of investment analysis at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit

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