The investment case for European equities

Forget the tech buzz in the US — Europe is stealing the show. Believe it or not, funds in the Europe ex UK sector are outperforming even the trendy Japanese market this year, leaving UK and Asian funds in the dust*. 

When we talk about European equities, we’re referring to companies from countries like Germany, France, Spain, Italy and many more. European companies cover a wide range of industries, from the latest tech trends to timeless luxury goods. Some of these companies are like hidden gems, ready to shine in the global market. 

Why Europe?  

Sure, Europe has its economic challenges — who hasn’t? But despite the ups and downs, European equities have been holding their own and even outpacing some other markets. It’s like finding the underdog that surprises everyone and steals the spotlight. 

Despite a slowdown in the European economy, there’s a surprising winner: European funds. And it’s not because everyone suddenly became optimistic about European companies. It’s because of some stellar companies in Europe that are riding the wave of global trends. 

Take ASML, for instance. They’re part of the AI semiconductor value chain. And then there’s Novo Nordisk, rocking the world with diabetes and weight loss drugs. These companies are heavyweight champions in the stock market, and their shares are soaring. 

Investors looking for exposure to those companies might consider the Comgest Growth Europe ex UK fund which currently holds both ASML and Novo Nordisk in their top five**. This is a high-conviction portfolio with around 30 holdings, targeting long-term growth companies.  

Europe is, of course, facing economic challenges, but there are still world-class businesses like Genus, a gene editing pioneer, and French biotech group Biomerieux, making waves. These companies are riding high on structural trends like energy efficiency and electrification, supported by government spending programmes. And guess what? They’re often available at lower prices compared with their US counterparts. Who doesn’t love a bargain?!  

Backing the little guys 

Now, here’s where it gets interesting. While the big guys are doing great, there might be an even greater opportunity with smaller companies. A reminder that small-caps can vary across different regions and refers to the total market value of all their outstanding shares.  

The MSCI Europe Small-Cap Index is made up of around 949 constituents, with an average market-cap of $1.1bn***. The largest constituent is around $7.3bn*** – so the index includes companies that have a relatively high market cap. 

Small-caps in Europe are at near-record low valuations compared with their larger counterparts. Sure, there are challenges. Smaller companies are more domestically focused, and Europe’s economies are a bit shaky. But if interest rates shift, these smaller companies could bounce back quickly. It’s like finding hidden gems in the market. 

Those looking for that hidden gem might consider the Janus Henderson European Smaller Companies fund, for example. This is a pure small-cap fund with managers willing to invest in the smallest of companies that are often ignored by their peers.  

Another option for investors is the Jupiter European Smaller Companies fund. This is quite concentrated for a smaller companies fund, with between 50 and 60 holdings, meaning the fund generally avoids the smallest companies in the region.   

Diversifying your portfolio  

Not entirely sold on the European story? Here’s a nifty alternative that lets you dip your toes into the European market without diving in headfirst: global funds with a significant focus on the European region. 

Global funds allow investors to spread bets across various regions and industries, giving you a diversified portfolio with a sprinkle of Europe. For instance, you might want to check out funds that boast heavy weightings in Europe.  

Both JOHCM Global Opportunities and Rathbone Greenbank Global Sustainability have over a quarter of the fund exposed to European equities at 26% and 27% respectively**. While the former can invest in any company around the globe, the latter – as the name suggests – actively avoids businesses involved in unethical or unsustainable practices. 

Another option could be the Lazard Global Equity Franchise fund which targets companies that have an edge in their respective business sectors. This fund has a natural bias towards larger-sized companies and currently has 32% of the portfolio invested in Europe**. 

So, whether you’re a seasoned investor or just starting out, global funds with a strong focus on Europe can be your ticket to a well-rounded and globally diversified investment strategy. Whether you’re leaning towards the safe route or feeling a bit adventurous, Europe has something for every investor. 

*Source: FE fundinfo, sector performance, 1 January 2023 to 20 November 2023 

**Source: fund factsheet, 30 September 2023 

***Source: MSCI index factsheet, 31 October 2023