The Analyst: It's time to fly the flag for Europe again
Saturday 06 September 2008
I find that Europe generally tends to be an unpopular investment area with the general public. Now, I admit that the start of 2008 was arguably the worst period for European shares since the 1970s, so perhaps investors' hesitance is correct. However, over the long term it has been a superb area in which to be.
Perhaps the investor antipathy stems from Europe's barmy left-of-centre politicians and even barmier bureaucracy. However, as I have mentioned in previous columns, it is a mistake to equate politics, or even economic performance, with stock markets. Until recently, China's phenomenal economic expansion wasn't being translated into stock-market growth. Europe, on the other hand, has many world-class companies that have prospered despite the politicians.
One of my favourite funds investing in the region is Neptune European Opportunities. It launched in November 2002, but the current manager, Rob Burnett, took over in 2005. It is fair to say that at the time I had some reservations: he was undoubtedly extremely bright, but also young and I often look for experience in fund manager. My fears were unfounded – the fund has gone from strength to strength under Burnett's watch, and my opinion of him improves each time we meet. He has, of course, got the support of some highly experienced Neptune old-timers, including managing director Robin Geffen, chief economist Derrick Bartlett and Chris Taylor.
Neptune's process is based on global sector views. The aim is to assess whether each sector is likely to perform well or not, weight them accordingly, and then select the most promising stocks within each sector. The fund managers meet with the in-house economists and analysts to discuss these issues. In the European Opportunities Fund, Burnett is happy to buy wherever stocks offer the most attractive opportunities within the chosen sectors; it generally does not matter to him in which country those stocks are located. The only sector that is an exception is banking, where he believes the disparities between different counties mean that consideration must be paid to geographic location.
The heart of Neptune's success over the last year has been its sector analysis on financials. It was one of the first, if not the first, investment houses to recognise the problems in the sector. It has thus avoided the carnage in banking shares. However, it has not been totally wedded to this idea within the fund; over time, Neptune became conscious that being positive on commodities and negative on financials was an extremely fashionable view. In investment, the fashionable decisions rarely produce the best returns. In July, the managers felt that some adjustments were necessary.
The timing could hardly have been better, given that in the middle of July banks started to move up while the oil sector started to move down. Burnett therefore increased his exposure to financials but he believes this rally will run out over the next couple of weeks; he believes that the sector will struggle again towards late September and October. He will therefore look to exit his positions over the next few weeks.
He is looking for two things before he will become more bullish: the banks admitting that they still have problems and raising more money, and stability returning to the US housing market. This will allow stock markets to focus on future prospects with greater certainty. This year has been good for sterling investors because of the strength of the euro, but Burnett believes this will reverse over the next few months. This may sound like bad news, but he believes a weaker euro would be positive for European stock markets, which are particularly export-orientated (lessons here for the UK, perhaps?).
So remember that the bad times don't last forever, and that stock markets are likely to recover before the economy does. In my view, the Neptune European Opportunities Fund would make an excellent long-term investment.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
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