Europe offers far more than warm weather, sparkling seas, bountiful shopping and exotic food. If you are looking to improve your financial returns, the Continent offers plenty of opportunities as long as you are optimistic about global economic recovery.
Gavin Haynes, an independent financial adviser at Whitechurch Securities in Bristol, recommends that investors hold about 20 per cent of their portfolio in European stocks.
This is within a framework that involves a 50 per cent exposure to the UK, 20 per cent US and 10 per cent in specialist markets such as Japan and the rest of Asia.
"Europe is certainly an area that we like at the moment," Mr Haynes said. "European companies are highly growth-orientated, which means they will exaggerate the upside when the global economy is recovering, but also will fall further when the global economy is in decline. Because we are optimistic on global prospects, we expect Europe to continue faring well. One concern, however, is the strong euro, which makes it more difficult for the companies to be globally competitive."
Unfortunately, when investing in Europe, it can be harder to visit the individual countries to invest in their shares. But you can invest in companies on the continent via your UK stockbroker.
Stephen Ford, a stockbroker at Brewin Dolphin in London, says investing in European shares is fairly straightforward but can be costly.
Most UK stockbrokers have contacts in other European countries with whom they will trade, so it is preferable to use a UK contact instead of taking a punt on a local broker you probably will not have met. UK stockbrokers have individual contacts in different countries with the necessary expertise in the local market. It is in their interest to maintain relationships with overseas brokers to ensure charges remain competitive.
Investing in European shares does not come cheaply, as you will probably have to pay one dealing charge to the UK agent, and a second fee to the European broker. The European broker's fee is not expressed separately, but as a part of the overall trade, which means the buying cost of shares is more expensive than trading in UK shares.
If a client buys 500 shares in the German markets at €15 (£9.90), the cost would be €7,500. However, if the local broker's fee is €60, the cost of the shares is said to be €7,560. This is expressed as a gross price per share of €15, and a net price of €15.12 (the real price including the local charge). "The application of two charges on each deal increases the spread, and therefore a bigger price move is required before the trade moves into profit. Furthermore, the existence of gross and net prices can often confuse clients as it increases the buying price and reduces the selling price," Mr Ford said.
The commission your local stock broker charges on an overseas trade should be no different from dealing locally, although some of the requirements may change slightly.
Brewin Dolphin, for example, would generally apply the same commission rates on overseas trades as it would for UK trades. The difference, however, is that the minimum charge may increase, regardless of the size of trade. An investment-managed client of Brewin Dolphin who is receiving advice would be subject to a minimum charge of £100 in Europe, rather than £30 within the UK. "This requires bigger stakes to be taken to keep charges in proportion," Mr Ford said.
Overall, however, the process for the client of buying shares on the Continent is the same as for the UK. "The client needs to understand the gross and net price, what rates at any currency conversion will occur, and the minimum charges," said Mr Ford. "And those clients wishing to deal in really esoteric markets may find their order refused as it costs time and money establishing arrangements in foreign markets. Brokers will not normally undertake this work for just one deal."
When considering buying Continental shares, it is worth checking that you will be able to trade them outside your UK broker's hours, as this varies between organisations. If this is not possible, it could be wise to cover your position by setting limit orders on your shares.
While many holiday seekers may relish the thought of a weakening euro, this is not so good in investment terms and the currency risk is always worth considering.
Mr Ford said: "Currency will certainly be an issue this year as the yield gap between the European Union and the UK will widen further. It is conceivable that we could see European Central Bank rates at 1.5 per cent and UK rates at 4.5 per cent over the next six months. That, combined with stagnation in Europe and growth in the US, leads us to believe the euro will drift down over the next six months and this will have a negative impact on returns."
With so much to consider when investing in Europe, it could make sense to put the job in the hands of a professional by investing in a managed fund of European shares. On this front, investors are spoilt for choice. Within the UK market, there are 102 unit trust/open ended investment company funds to choose from, and a further 17 investment trusts.
Mr Haynes recommends Artemis European Growth, managed by Philip Wolstencroft, who has developed an excellent record with a sophisticated quantitative stock-screening tool as a first step in the stock-selection process. Mr Haynes recommends Isis European Prime, managed by Davina Curling, for the more aggressive investor. "This is a new breed of one of the more aggressive funds as it holds a concentrated portfolio of around 40-50 best idea stocks and the highly experienced manager is not shackled by any index-risk constraints," Mr Haynes said.
More cautious investors would be suited to Odey European, managed by Hugh Hendry. This manager uses investment principles associated with hedge fund management. When he is particularly bearish on markets he will hold much of the fund in cash rather than declining shares. At points within the past three years he has held up to 40 per cent of his portfolio in cash, a strategy rarely adopted by his peers, according to Mr Haynes.
You can invest in funds via the fund manager direct, or through your IFA. You can save on initial charges (often up to 5 per cent of the investment) through a discount broker such as Best Invest, Chelsea Financial Services or Financial Discounts Direct. Alternatively, you can use a fund supermarket such as Fidelity's FundsNetwork, or HL Vantage.
If you have little faith in active managers, but want to invest in a basket of European shares, then consider exchange traded funds (ETFs) which are essentially a share listed on the London Stock Exchange, but tracking a particular index.
To gain exposure to Europe, you could hold ETFs such as the iShares FTSE Euro 100, which holds the 100 largest companies on the continent, or iShares DJ EuroStoxx 50, which holds 50 of the largest European companies. In addition to offering flexibility, these ETFs have cheap annual management charges. The FTSE Euro 100 has a total expense ratio of 0.55 per cent while DJ EuroStoxx 50 is just 0.35 per cent, which compares favourably to around 1.5 per cent in an active managed unit trust or open ended investment company.
THE ANALYSTS' VIEW
There are exciting stock opportunities to be found in Europe, according to Paul Casson, manager of the SVM Continental Europe fund. He likes Portugal Telecom and the Dutch airline KLM.
Mr Casson said Portugal Telecom had languished on a low valuation after the stock was hit hard amid the bursting of the TMT bubble in early 2000. Although the stock has recovered somewhat in the last year, it still represented an attractive opportunity, he said. The stock should benefit from increased revenue amid Portugal's emergence from a recession. In addition to being the biggest fixed-line and mobile operator, Portugal Telecom also controls the cable infrastructure. This is different from most other European countries, where cable is a competitor, so its local business is relatively well defended. Meanwhile, Mr Casson said, the growth potential comes through its 50 per cent ownership of the Latin American company Vivo, which is a big driver of its earnings. "The company has a strong dividend yield and is buying back 10 per cent of its shares. I expect around 15 per cent upside in the share price of Portugal Telecom over the next year," he said.
KLM, which bought Air France, has performed well in the last year but Mr Casson expects the share price could rise another 20 per cent in the next year.
Much of the strong returns will be due to an improving load factor, as the rate of passenger growth amid global recovery is stronger than capacity expansion. "KLM is also seeing an improvement in premium traffic across long haul, which is essentially where the big profits are made," Mr Casson said. "Meanwhile, there is the upside of cost cutting. Prior to the Air France merger being given the go-ahead, KLM had already implemented its own restructuring plan which aimed to improve their operating income by €200m in the tax year just ended, and by April next year a cumulative €650m."
Iain McNeill, manager of Insight's European Dynamic and European Opportunities funds, is not excited about the prospects of the Continent as a whole, but believes there is potential to unearth gems. The EU's expansion to include 10 more countries from next month will provide growth potential for stocks with eastern European exposure such as KBC Bancassurance, Heidelberg Cement and Bank Austria.
He is taking a contrarian view in his portfolio, one example being Royal Dutch/Shell, on which the market is pessimistic due to the failings of past management and announcements of reserves underestimates. The subsequent depressed valuation is an opportunity to take a position in a world-leading oil company, Mr McNeill says. He is also optimistic about the Liquefied Natural Gas market, which is set to grow six fold over the next decade. So he has taken a position in Golar, a shipping company.