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In ruins? Europe ‘to return 30pc in three years’

Laura Suter
Emerging from the ruins? Europe looks set to grow - AP

Europe will grow faster than Britain and deliver 30pc returns to investors in three years, a fund manager has claimed.

Rory Bateman, head of UK and European investments for fund giant Schroders, said the fortunes for Europe looked promising, while Britain’s growth would be more muted.

He pinned his expectations for Europe’s improving fortunes on two things: low interest rates and companies’ increased profitability. In addition, the fall in European markets since May provided a cheap entry point for investors, he added.

Mr Bateman is not alone: a number of other asset managers have put more of their clients’ money into Europe in recent months.

Damian Barry, an investment manager at 7IM, said he currently had his biggest bet on Europe. The firm’s “balanced” multi-asset fund, which invests across a range of assets and stock markets, currently has 8pc of its money in Europe, whereas the continent accounts for just 6pc of global stock markets.

“In recent years Europe has had its share of problems, a lot of them political,” Mr Barry said. “But what we see this year is that the political risks have dissipated and, coinciding with that, the economy is doing much better. We are seeing better numbers out of Italy, Spain and even Greece, as well as Ireland, and there’s reason to be optimistic about the future.”

At the beginning of the year there was a lot of nervousness about elections across Europe, but these have largely been allayed. This weekend’s German elections are widely predicted to be won by Angela Merkel, further boosting stability in the region.

Richard Turnill, the global chief investment strategist at BlackRock, the giant asset manager, also believes now is the time to invest in Europe. He said: “A largely benign European political backdrop looks to be setting the stage for a favourable investment environment in the near term.”

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Mr Bateman said the prospects for Europe were better than Britain’s. “The UK market offers lots of different opportunities, but Brexit is likely to have some impact on the economy,” he said.

“Clearly confidence is a bit more fragile and we think that means investors are more reluctant to pay up for the UK market in the same way as for Europe. Britain is further through the economic cycle; in Europe they are at an earlier stage so you can find more upside in Europe than in the UK.”

Even UK managers are attempting to gain a piece of the European growth story. Richard Bullas, a fund manager at Franklin Templeton, runs a fund that invests in smaller British companies.

However, he said he was nervous about the spending power of British consumers and was instead looking at companies with ties to European growth, such as manufacturing firms that work with European companies.

But what are the risks?

Many investors are keen to know how much Brexit will weigh on the region.

The impact on currencies is the biggest worry, said Mr Barry. The euro has rallied recently, while the pound has yet to recover all of its sharp fall in the wake of the Brexit referendum. He said he was paying close attention to Theresa May’s speech on Brexit this week, as “her stance may have an impact on currency”.

For Mr Bateman the risks to Europe are more global, such as whether China’s growth is sustainable and fears over North Korea.

How cheap is Europe?

One way to measure how cheap markets are is the price to earnings or p/e ratio of the country’s stock market.

A slightly more complex method uses the “Cape” measure. Cape stands for the “cyclically adjusted price to earnings” ratio and compares companies’ average annual earnings over 10 years (adjusted for inflation) with their share price.

Studies have shown that investing in shares (or entire markets) with low Cape valuations tends to result in higher returns in subsequent years – although this is by no means guaranteed, of course.

The table below, with data from Star Capital, a German investment firm, shows how each country stacks up. Based on the data, Star Capital predicts returns of 6.8pc per year from Europe, compared with 3.5pc for America and 7.5pc for emerging markets.

However, it does warn of pockets in Europe that will have lower returns – such as Denmark and Ireland, which have high Cape measures.

How cheap is Europe?

What to buy?

As with any market, there are a wide range of European funds that invest in different parts of the market.

Mr Barry bought two new funds this summer, one of which is Miton European Opportunities. He said Miton invested in smaller European companies, typically offering higher growth and with big, recognisable brands, such as car maker Ferrari, its largest holding.

Those who prefer investment trusts could consider the Jupiter European Opportunities Trust, which features in the Telegraph 25 list of our favourite funds.

Those who want a “passive” option that just tracks the market’s performance can look to the Vanguard FTSE Europe ETF or iShares’ Core MSCI Europe ETF – both of which have a 0.1pc annual charge.

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