Page 32 - DIY Investor Magazine | Issue 36

Dec 2022 32
DIY Investor Magazine ·
QD VIEW – INVESTING IN EUROPE AT A TIME OF RECESSION
Recession now appears inevitable across much of Europe – and may already have started... by award winning journalist Cherry Reynard
A grim winter of potential fuel shortages and economic disruption looms. However, the impact for stock markets is not clear-cut. With a range of styles in the European sector, could one prevail over another in the tough year ahead?
There has been a huge disparity between European trusts since the start of the year, split largely on value versus growth lines. Fidelity sits at the top, having risen 3.2% for the year to date, while Baillie Gifford European Growth has lost 39.8%.
While BlackRock Greater Europe has been weak over the past year, it is still second in the sector over three years, while the two Henderson trusts – European Focus and Euro Trust – have chartered a middle path. The Henderson European Focus is down just 4.5% for the year to date and up 22.3% over three years.
The economic outlook is difficult. The European Commission’s autumn economic forecast predicted that the eurozone and most EU countries would be in recession by the final quarter of 2022. “The economic situation has deteriorated markedly and we are heading into two quarters of contraction,” said EU economy commissioner Paolo Gentiloni[1].
Inflation is still running at 10%[2], though this is down from 10.6% in November and lower than economists’ forecasts. It gave investors some hope that inflationary pressures may have peaked as wholesale energy and food costs began to fall.
This may moderate the ECB’s enthusiasm for raising rates and markets now expect a rate rise of 0.5% at the next meeting, compared to 0.75% at the previous two meetings.
‘THE ECONOMIC SITUATION HAS DETERIORATED MARKEDLY AND WE ARE HEADING INTO TWO QUARTERS OF CONTRACTION’
AN UNCERTAIN OUTLOOK
It is possible to make a plausible narrative both for a severe recession and a milder slowdown. Tom O’Hara, manager on the Henderson European Focus Trust, says: “A normal recession is very much in the price of European stocks. We’ve had a stock market bounce on the US CPI print and we may be through the cost of capital peak. However, the outlook isn’t clear-cut yet.”
He points to a number of risks: “If there is a colder spell, could there be blackouts? That will impair GDP. Energy storage is at good levels, but that may not be enough. It is also possible that something breaks in the financial plumbing.” He says the UK’s mini-budget experience has shown the fragility of government bond markets. Italy has high debt to GDP and may be a target for the bond vigilantes if there are signs of weakness. The EU has launched its “anti-fragmentation” tool to try to resolve the problem.
‘HIGH QUALITY COMPANIES WITH SOLID FUNDAMENTALS, WHICH OFFER A VALUE THAT IS MEASURABLE AND MONETIZABLE’
However, as Alexander Darwall, manager of the European Opportunities trust, points out, the economic situation in
Europe has seldom been great. “Europe has been a chronic underperformer compared to the rest of the world, but we’ve always side-stepped it by finding great European companies. We do not rely on European economies to make progress – and that would be a particularly high risk strategy today.”
The companies in the European Opportunities portfolio tend
to be global, and often, the most successful parts of their business are overseas, says Darwall. His view is that European companies excel in certain areas.