The shoe could finally fit as fund managers tip Cinderella Europe

Eurozone could be a surprise candidate for brave share-buyers. Danielle Levy reports on their prospects

Europe is the Cinderella continent, at least as far as investors have been concerned, and it is easy to see why. Bailouts, a troubled single currency, recession, unemployment and a good degree of political instability is too heady a brew for most private investors.

But almost imperceptibly the eurozone is staging a comeback after emerging from recession. Even Greece, the austerity-stricken ugly sister of the monetary zone, is moving towards a budget surplus for the year. And now the German election has been and gone, some argue the future for the eurozone is looking much brighter.

Buoyed by a more-positive economic backdrop, the FTSE Europe index has risen almost 20 per cent since the start of the year.

As Europe is home to a whole swathe of world-class companies that some argue continue to look cheap, is this now the right time to buy European stocks?

"Economies in Europe are recovering. Not necessarily rapidly but at a quick enough pace to allow for a turnaround in profits and sentiment towards European markets," says Hugh Sergeant, a fund manager at River and Mercantile.

"At a company level in Europe there has been aggressive cost-cutting, which means any improvement in demand will feed through to a significant increase in profits."

He believes Europe is just at the beginning of this cycle and forecasts profit growth of at least 30 per cent for the region's corporates, led by banks and other sectors sensitive to the economy.

His enthusiasm is echoed by a sample of 35 leading fund managers including Invesco Perpetual's renowned UK equity-income manager Neil Woodford and AXA Framlington veteran Nigel Thomas.

Asked by fund broker Chelsea Financial Services to select the developed stock market they expected to perform best over the next 12 months, 40 per cent selected Europe, trailed by the US with 29 per cent.

Nonetheless, headwinds threatening the eurozone's nascent recovery clearly remain. This week saw centre-right leader Silvio Berlusconi's attempt to destabilise the Italian government and meanwhile unemployment data in the eurozone showed it is stubbornly high at 12 per cent in August, up from 11.5 per cent a year earlier.

"I think it is going to be a slow burn. I think we will see a gradual improvement through to 2014 in European economies, but I would expect to see some holes in the road – particularly in relation to the Italian political situation," says Julian Chillingworth from Rathbone Unit Trust Management.

He expects the eurozone to survive, albeit with potentially different members in five to 10 years' time, but views the lack of a fiscal or banking union as a danger.

Mr Chillingworth also warns that growth in euroland is still reliant on Germany's export-driven economy. With this in mind, he finds it hard to get excited about the prospects for peripheral states, warning of "illusory value" in the share prices of domestically-focused southern Europe stocks.

He is more positive on big European stocks like French energy giant Total, with the potential to benefit from any improvement in underlying global economic growth, alongside improved sentiment towards commodities.

John Bennett, a European equity -fund manager at Henderson Global Investors, warns those interested in investing in Europe to familiarise themselves with the phrase "two steps forward, one step back".

Although markets have continued to rise steadily since the summer of 2012, after European Central Bank head Mario Draghi said he would do whatever it takes to ensure survival of the euro, Mr Bennett anticipates further volatility.

Nevertheless he is positive on pharmaceuticals, with Novartis, Roche and Sanofi his star picks.

He argues the sector is just two to three years into a decade-long growth cycle.

Europe is home to a number of consumer-facing globally recognised brands which can offer investors exposure to growth in Asia and other emerging markets experiencing a rise in domestic consumption. Consumer staple Nestlé and luxury retailer LVMH, the parent company behind Louis Vuitton and Christian Dior, sit in this camp. However, as both have posted double-digit share-price returns over the past three years (LVMH is up nearly 40 per cent), is it worth investing in cheaper but riskier domestically-oriented stocks?

Jonathan Ingram, who manages the JP Morgan Europe ex UK fund, takes this view. He says some of Europe's global dividend-paying companies now look expensive and sees better value in other parts of the market.

"We are very happy to buy companies with domestic exposure, like Bank of Ireland," he explains.

Bank of Ireland may have been rocked by the financial crisis, but he says things are now looking up for both the bank and the Irish economy. Yet this area of the market is prone to bouts of volatility and is not for the faint-hearted.

In the UK, as investors prepare for the Royal Mail privatisation, Mr Ingram says delivery companies could be another way to benefit from Europe's improving economic backdrop, particularly a rise in consumer spending. He cites courier company Deutsche Post and international delivery stock PostNL as top picks.

For those who prefer to gain exposure to the region through an actively managed fund, Robert Burdett of F&C Investments highlights the BlackRock European Dynamic Fund, and also recommends the stock-picking skills of Henderson European Special Situations, which tends to target undervalued mid-cap stocks.

If you expect further market rises in Europe and are willing to take on exposure to riskier areas, a lower-cost exchange-traded fund, a stock that trades on an exchange but tracks an index, or an index fund could be an alternative.

Oliver Tucker of Sarasin & Partners says the iShares MSCI Europe ex UK ETF is a way to get a broad exposure to the market that some active managers have typically avoided. Mr Burdett selects the BlackRock BCIF Continental European Equity Tracker.

But whatever way you look to invest in Europe be prepared... the worst may be over but there will be major bumps in the road.

Danielle Levy is a reporter at citywire.co.uk

Sport
Lionel Messi pictured after reaching the final
world cup 2014
Sport
Lionel Messi and Thomas Muller have shone brightest for Argentina and Germany respectively on their way to the World Cup final
Sport
Brazilian fans watch the match for third place between Brazil and Netherlands
Brazil 0 Netherlands 3: Dutch pile on the misery in third place playoff
Arts and Entertainment
TV The follow-up documentary that has got locals worried
PROMOTED VIDEO
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
News
Ian Thorpe had Rio 2016 in his sights
people
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Voices
Mrs Brown's Boy: D'Movie has been a huge commercial success
voicesWhen it comes to national stereotyping, the Irish know it can pay to play up to outsiders' expectations, says DJ Taylor
Arts and Entertainment
Curtain calls: Madani Younis
theatreMadani Younis wants the neighbourhood to follow his work as closely as his audiences do
Arts and Entertainment
'Deep Breath' is Peter Capaldi's first full-length adventure as the twelfth Doctor
TVFirst episode of new series has ended up on the internet
Life and Style
Douglas McMaster says the food industry is ‘traumatised’
food + drinkSilo in Brighton will have just six staple dishes on the menu every day, including one meat option, one fish, one vegan, and one 'wild card'
Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
    Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

    Otter man Gavin Maxwell's bitter legacy

    The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
    Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

    Joanna Rowsell: 'I wear my wig to look normal'

    The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
    Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

    Bill Granger's quick and delicious marinades

    Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
    Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

    Anyone but Argentina – why Brazilians don’t love their neighbours any more

    The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
    The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

    The Open 2014

    Time again to ask that major question - can Lee Westwood win at last?