Western Europe

Tuesday, December 22, 2015 - 09:48

Brandenburg Gate

Western Europe is now adding QE (Quantitative Easing) to LTRO, TLTRO, OMT, SMP, ABS, ESM and EFSF and its alphabet soup of policy initiatives. Bulls assert this shows how the authorities at the European Central Bank (ECB) and European Union (EU) will not rest until the Eurozone bloc is back on a healthy growth trend and inflation is nearing their 2% target.

Sceptics wearily counter by arguing the very fact that QE is deemed necessary merely shows how the previous plans have failed to drag Europe out of an ever-deepening quagmire of debt.

At least Western European equities look cheap relative to both their own history and the USA. The issue now is whether companies can conjure up the growth rates which may act as a catalyst to unlock this value.


At its core, the European Union has two goals: peace and prosperity. Its success with the former is clear, as there has been no armed conflict in Western Europe since 1945 (even if it has had to grapple with the 1990s civil war in Yugoslavia and this decade’s lunge for Crimea by Russia). Progress is less clear cut on the second point, with unemployment high across the bloc and the influx of migrants from the Middle East testing the budgets and political mandates of Brussels and Berlin to the full.

Chancellor Merkel continues to set the tone for now on the immigration debate, just as she did when it came to the Greek debt crisis. Germany’s hardline position eventually ground down opposition to austerity in Athens.

Two general elections and a referendum in Greece eventually put the left-wing Syriza party in power, headed by Alexis Tsipras. His first administration put the maverick professor and game theorist Yanis Varoufakis in charge of the nation’s finances but after September’s poll the Prime Minister turned to Euclid Tsakalotos.

Both men took a softer line to secure a third bail-out, worth €86 billion over the next three years, as they ceded to German demands.

Take us to your leader

Merkel will be hoping her clear stance on these key issues will play well with German voters when she seeks re-election in 2017, a year which will also have huge political import in France, where François Hollande will also fight for a second term.

Elections due in Western and Eastern Europe in 2016

Date Country Ballot
January Portugal Portugal President
March Slovakia Slovakia President
April Ireland Ireland Parliament
Austria Austria President
Macedonia Macedonia Parliament
June Iceland Iceland President
August Estonia Estonia President
September Russia Russia Parliament
October Lithuania Lithuania Parliament
Montenegro Montenegro Parliament
November Romania Romania Parliament

Source: BBC

On the face of it there is less scope for drama in 2016, although a first big test of the electorate’s views of the migration issue could come with Austria’s Presidential poll in April.


In January 2015, some 30 months after his summer 2012 promise to do “whatever it takes” to preserve the Eurozone, European Central Bank (ECB) President Mario Draghi finally delivered.

The former Goldman Sachs banker launched a €1.2 trillion QE programme designed to run from March 2015 until September 2016.

He then spent much of the second half of the year dropping heavy hints that he would do more if the ECB’s 2% inflation goal remained elusive – which it did.

Even as stock and bond markets lapped up the injection of QE, inflation for the 19-member Eurozone stayed stuck at zero.

Eurozone inflation is still stuck around zero

Eurozone inflation is still stuck around zero

Source: Eurostat

Unemployment proved equally intractable. The rate for the 19-member Eurozone area is higher now than it was in 2010, although for the entire 28-nation EU it stands at 9.5%, marginally below January 2010’s 9.6% rate.

Eurozone unemployment is higher than it was in 2010

Eurozone unemployment is higher than it was in 2010

Source: Eurostat

The International Monetary Fund expects Eurozone GDP growth of just 1.6% in 2016, well below the 2.2% it expects from all advanced economies and its 3.6% global estimate.

Debt burden

This all leaves the ECB on a state of high alert and hence the ongoing chatter about more QE and further interest rate cuts. The deposit rate is already negative – so the ECB charges banks to park their cash – but this is yet to stoke a round of fresh lending growth or increased demand for credit.

ECB’s key interest rates have been grinding lower

ECB’s key interest rates have been grinding lower

Source: Thomson Reuters Datastream

Yet for QE and the Eurozone’s alphabet soup of other loan programmes to work, Europe needs banks who want to lend and borrowers who want to borrow.

Neither seems particularly evident, which is hardly a surprise as Europe’s banks are still lumbered with €1 trillion in non-performing loans, according to the IMF.

This suggests growth could remain at a premium, not least because the European solution to a debt crisis has been to throw more debt at it, a technique which has yet to prove itself in the case of Greece.  

Greece’s debts have risen inexorably and GDP has shrunk

Greece’s debts have risen inexorably and GDP has shrunk

Source: Eurostat, World Bank, International Monetary Fund


So far, QE in Europe has had similar effects to those seen in Japan: little marked acceleration in inflation or GDP, a falling currency and a rising stock market. To use plainer language: real economy (and the euro) 0, financial economy 1.

The single currency is a key sacrificial lamb when it comes to Draghi’s plans to reinvigorate European growth. The Italian seems unconcerned by weakness in the euro which, barring the odd rally, has trended lower for two years.

Euro is again losing ground against the pound and the dollar

Euro is again losing ground against the pound and the dollar

Source: Thomson Reuters Datastream

This is something investors need to bear in mind as they consider whether to buy European financial assets or not. Although the Stoxx Europe 600 index has done fairly well in euro-terms, the counter’s decline against the pound means the Eurozone has actually lagged the FTSE All-World this year when returns are calculated in sterling.

Euro weakness means Western Europe has lagged in 2015

Euro weakness means Western Europe has lagged in 2015

Source: Thomson ReutersDatastream

Mind the gap

Europe’s debt woes are reflected not just in its modest GDP growth, weak currency, average stock market performance - and its corporate profits growth profile.

Eurozone earnings have consistently lagged their historic trend rate of progress since the Great Financial Crisis, according to equity strategy boutique Mirabaud Securities.

Such a ‘performance gap’ may help explain why Western European stocks look cheap relative to their history, in contrast to say the UK or USA, where the ratings appear to be more full.

On Mirabaud’s trend valuation figures, again using long-run profit paths rather than one-or-two-year forward forecasts, Europe trades on around 11 times earnings, compared to a long-run (ex-1998 to 2000 Bubble) average of 12.5.

By contrast, Mirabaud’s analysis suggests the USA trades on 17 times trend earnings against a long run average of 15.

The 35% discount between the trend ratings attributed to Europe and America stands at near its highest level, at least since 1980. The long run average of 16%.

Europe has traded at a similarly large discount four times in the last 35 years and the gap closed markedly to barely 10%. On three occasions US equities mainly paddled sideways while Europe rose, so American stocks do not need to collapse to close the gap, although this is what happened during 1998 to 2001.

Trigger point

Manneken Statue

An acceleration in European GDP growth and corporate earnings power could help trigger a re-rating but the tricky bit is how to measure this easily.

Thankfully, there is a potential short-cut.

Belgium’s Courbe Synthétique looks to be an uncannily useful guide to the fortunes of the Euro Stoxx 600 index.

The results of the business sentiment survey are released on the National Bank of Belgium’s website on around the twenty-first of each month and they can provide a useful shorthand to Europe’s business affairs.

Belgium's Courbe Synthétique is a good indicator for Eurozone equities

Belgium's Courbe Synthétique is a good indicator for Eurozone equities

Source: National Bank of Belgium, Thomson Reuters Datastream

How to Access Western European Markets

According to Morningstar there are over 100 OEICs which address large-cap European equities and another dozen that specialise in small caps. Eight more dedicate themselves to the quest for income and a final batch of 16 offer exposure to Western Europe on a currency-hedged basis, for those worried about the fate of the euro. Eleven OEICs specialise in Eastern Europe.

Best performing Europe ex-UK Large Cap Equity OEICs over the past five years

OEIC ISIN Fund size
£ million
Annualised five- year performance Twelve-monthYield Ongoing charge Morningstar rating
Man GLG Continental European Growth Professional C (Acc) GB00B0119487 £221.3 14.5% 1.73% 1.03% *****
Jupiter European I (Acc) GB00B5STJW84 £3,271.6 12.7% 0.74% 1.03% *****
Scottish Widows HIFML European Focus 1 (Acc) GB00B3BLSG41 £10.7 12.6% 0.08% 1.73% *****
Henderson European Focus I (Acc) GB00B54J0L85 £458.6 11.9% 1.51% 0.87% ****
Threadneedle European Select Net GBP (Acc) GB0001445229 £2,936.7 11.5% 1.44% 1.06% *****

Source: Morningstar, for Europe ex-UK Large-Cap Equity category. Accumulation units only. Where more than one class of fund features only the best performer is listed.

Nine investment trusts target Western large caps, four are small-cap experts and two more.

Best performing European investment companies over the last five years

Investment company EPIC Market cap(£ million) Annualised five- year performance * DividendYield Ongoing charges ** Discountto NAV Gearing Morningstarrating
Jupiter European Opportunities JEO 632.7 20.2% 0.6% 3.92% 4.3% 9% *****
Henderson European Focus HEFT 206.0 15.2% 2.4% 1.59% 1.0% 4% *****
Henderson Euro HNE 183.4 14.5% 2.1% 1.37% 1.3% 6% *****
JP Morgan European Income JETI 105.6 12.9% 3.6% 1.08% 0.0% 11% n/a
Fidelity European Values FEV 697.5 12.2% 1.9% 0.97% -7.4% 4% ****

Source: Morningstar, The Association of Investment Companies, for the Europe category.* Share price. ** Includes performance fee

While exchange-traded funds (ETFs) providers are particularly active, offering pan-continental instruments, as well as those which target specific nations or industrial sectors, as well as mid and small caps. Currency-hedged ETFs are also available, although many European ETFs have a relatively short trading history.

Best performing Europe Large Cap Blend Equity ETFs

ETF EPIC Market cap
£ million
Annualised five-year performance Dividend yield Fund OngoingCharge Morningstar rating Replicationmethod
db x-trackers Stoxx Europe 600 (DR) 1C GBP XSX6 1,008.7 6.77% n/a 0.20% **** Physical
iShares MSCI Europe (Acc) GBP SMEA 425.5 6.13% n/a 0.33% **** Physical
db x-trackers MSCI Europe (DR) 1C GBP XMEU 2,132.2 6.12% n/a 0.30% **** Physical
HSBC MSCI Europe GBP HMEU 167.7 3.23% n/a 0.30% **** Physical
iShares FTSE Eurofirst 100 (GBP) IEUT 32.9 1.80% n/a 0.40% *** Physical

Source: Morningstar, for European Large-Cap Blend Equity category. Physical ETFs only.
Where more than one class of fund features only the best performer is listed.

AJ Bell’s top trackers for Western Europe

AJ Bell’s free investment guidance service is based on our list of sixteen Top Trackers. One of these directly covers Western Europe and one more gives a role to Eurozone stocks.

The Vanguard Developed Europe ex-UK tracker has the EPIC code of VERX and a SEDOL of B9L8M65.

The tracker seeks to deliver the performance of an index which contains over 375 large and mid-cap companies from 16 Western European stock markets.

The largest country exposures are Switzerland, France and Germany and the industries with the greatest representation include financial services, consumer goods, health care and industrials.

This tracker does not feature in the Cautious or Balanced portfolios but represents 15% of the Adventurous portfolio.

The iShares Core MSCI World tracker has the EPIC code of SWDA and a SEDOL of B4L60Z9.

The index contains over 1,600 large- and mid-cap companies from 23 different developed stock markets, including Western Europe, which has a weighting of 18% in the basket of assets, compared to 60% for America, 9% for Japan and 8% for the UK.

This tracker is 14% of the Cautious portfolio and 31% of the Balanced one. It does not feature in the Adventurous portfolio.

Western Europe also represents 25% of the investments covered by the iShares Global Government Bond and iShares Core £ Corporate Bond trackers which both feature in the Cautious and Balanced portfolios.

These articles are for information purposes only and are not a personal recommendation or advice. All data shown is correct at the time of writing.

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