Jo Groves
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Updated 19 Jan 2024
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

I should make it clear at the outset that this isn’t about the UK being robbed of its rightful place on the ultimate musical podium (although Michael Ball’s rendition of “One Step Out Of Time” would surely have been a worthy winner for the dancing alone).

Before I digress any further into decades of dashed musical dreams, it’s time to move swiftly on to a more equitable type of league table. In this case, the top-returning Investment Association sectors in 2023, which was the subject of my last blog (short answer: technology, Latin America and India). No big surprises there but I admit to a double-take at seeing Europe (excluding/including the UK) in fifth and sixth place. Putting this into context, the IA Europe sector (excluding the UK) achieved a one-year return of 14% in 2023, double that of the UK All Companies sector.

Rattling through a few of the top dogs, Danish drugmaker Novo Nordisk treated shareholders to a 50% share price gain in 2023, thanks to its game-changing anti-obesity drugs Wegovy and Ozempic. And it was a similar success story for French luxury goods brands L’Oréal and Hermès, in addition to chip-maker ASML (the Netherlands’ answer to NVIDIA). These companies epitomise the appealing blend of pricing power, resilient balance sheets and globally-diversified sales found in many European heavyweights.

With this in mind, have UK investors been blowing hot or cold on European equities? Well, the latter according to the latest Investment Association Survey which revealed that the average European allocation by UK investors has dipped to a decade-low in the last two years (and below that of UK equities). While a natural predilection to your home market is understandable, it’s worth pointing out that Europe accounts for around 11% of global stock markets (by value) versus less than 3% for the UK.

This begs the question: why are we neglecting our closest neighbours? Steering well clear of the B-word, investors often naturally gravitate to the sectors that shout the loudest and the ‘magnificent seven’ have had plenty of reasons to roar of late. But while European equities may have been overshadowed in the financial press by their glitzier US counterparts, flying under the radar hasn’t dented returns, with the IA Europe (excluding the UK) sector achieving a five-year total return of c. 50% (as at 15/01/2024).

Despite this, Europe remains strangely out of favour with global asset allocators, leaving valuations well below their long-term average. The MSCI Europe index is currently trading on a forward price-earnings ratio of 12.8x (as at 12/01/2024), substantially below the 19.9x of the MSCI US Index (according to Yardeni). This may be in part to the proximity to the Russia-Ukraine conflict and macroeconomic concerns across the continent, although there is a notable dichotomy between economic and stock market performance in some cases. Germany may have entered a recession last year but its stock market was among the best-performing in Europe in 2023, with the DAX index hitting a record high in December.

One trust bucking this allocation trend is Martin Currie Global Portfolio (MNP) which is significantly overweight Europe. Manager Zehrid Osmani runs a high-conviction, 30-stock portfolio, with Europe comprising 45% of the portfolio, compared to a benchmark allocation of 16% in the MSCI All Country World Index (as at 31/12/2023).

MNP has delivered a five-year share price return of 53%, significantly above the 33% average for the IT Global sector (as at 14/01/2024). It offers investors a blend of US tech companies such as NVIDIA, Microsoft and Adobe, together with other themes such as healthcare and luxury goods. This focus has paid off, with resilient consumer demand for high-end goods turbo-charging the share price of iconic car maker Ferrari last year, one of MNP’s largest holdings.

Within the European sector, Henderson European Focus Trust (HEFT) also has a strong track record of returns, rewarding investors with a five-year share price return of 71%, compared to 52% for the IT Europe sector (as at 14/01/2024). Perhaps more impressively still, it’s delivered positive returns in four of the last five calendar years, showing the manager’s ability to achieve returns in challenging market conditions.

HEFT has a concentrated portfolio of around 40 companies spread across a wide range of sectors, with almost half of the portfolio currently invested in France and Germany (as at 31/12/2023). Novo Nordisk is one of the trust’s largest holdings, which paid off handsomely given the company’s share price performance last year, while aerospace and defence specialist Airbus capitalised on the continued travails of rival Boeing.

Meanwhile, European Opportunities Trust (EOT) took the top accolade in our Kepler team picks of 2023, firing my colleague Alan to victory with a share price total return of 23% in 2023. EOT invests in world-leading global companies that happen to be listed in Europe and, as a result, is less dependent on the performance of specific economies than some of its peers.

As my colleague noted last year, around 40% of the revenue from EOT’s portfolio comes from North America, a third from Europe and a quarter from emerging markets. Long-term holding Novo Nordisk sells its pharmaceutical products in 170 countries, while LVMH earns more revenue from Asia than in the US (and more than twice as much as in Europe). EOT also offers a UK angle for investors, accounting for the largest share (of around 30%) of its portfolio (as at 31/12/2023).

Looking ahead, there may be short-term headwinds for Europe, with margins under pressure from weakening consumer demand, de-stocking and rising wages and oil prices. That said, valuations remain attractive relative to the US and higher-quality European companies may be well-positioned to benefit from any pivot in investor appetite away from the US.

So perhaps it’s time for UK investors to take Gina G’s advice and add “ooh aah just a little bit” of European equities to their portfolios in 2024 because, sometimes, it’s “better the devil you know”.

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