Why this fund region is seeing record investor demand

In June, one fund sector broke records for how much money it received from UK-based investors. 

Surprisingly, it was not the booming US market, or global category, where technology shares keep rising and breaking stock market records. And it was not cheap UK shares, which have responded positively to the new government. 

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In fact, Europe (excluding the UK) is one of the most in-demand sectors right now. 

The Investment Association (IA), a trade body for the funds industry, found that £868 million flowed into Europe funds in June, which was a monthly record. This made it the second-most popular sector overall in June, just behind short-term money market funds.  

The IA says that in early June encouraging inflation data and stable prices enabled the European Central Bank (ECB) to make a 0.25% cut to three key interest rates, which increased the appeal of European equities.  

The Stoxx Europe 600 index tracks the return of the 600 largest stock exchange-listed companies out of 17 European countries, including the UK.  

So far this year, it has risen 8%, which compares with a 13% return for the MSCI World index and 10.5% gain for the FTSE All-Share, including dividends.  

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But over longer periods it has performed better than the UK market, returning 49% over five years and 124% over 10 years, which compares with a 38% and 80% gain for the FTSE All-Share.  

The largest shares in Europe are Novo Nordisk, ASML, Nestle, AstraZeneca, Novartis and Shell.  

The top funds over the past decade investing in European shares, excluding the UK market, and available on the ii platform, include: CT Pan European Focus (186% return over the past 10 years); Fidelity European Dynamic Growth (166% return), and Jupiter European Growth (157% return). 

Europe funds on the ii Super 60-listed of recommended strategies include BlackRock Continental European Income, Janus Henderson European Select Opportunities, Fidelity European and The European Smaller Companies Trust.  

So, is it time to add a Europe fund to your portfolio? 

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JPMorgan European Growth & Income managers Alexander Fitzalan Howard and Timothy Lewis say that while canny long-term investors have had an eye on the strong recovery taking place in European markets, what makes the opportunity interesting is that European shares are still sitting at near-record discounts to their US counterparts. 

In fact, Lazard Asset Management finds that the price-to-earnings ratio of European shares is about one-third cheaper than that of the US market, showing that investors are paying less for profits in Europe. The discount to US shares has been falling steadily since 2020, despite European shares performing similarly to US shares over the past three years.  

This means relative to the US, investors could be getting a bargain by owning European shares, although the UK market still trades on a cheaper valuation than both.  

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Howard makes the point that the constituents of European markets have changed dramatically over the past couple of decades, and there are plenty of opportunities for growth.  

“The region’s largest businesses are no longer drawn from worthy but dull sectors such as telecoms and energy, but from more dynamic, forward-focused industries including technology, healthcare and luxury brands. 

“If you want exposure to artificial intelligence, you don’t have to buy Nvidia like everybody else. Why not consider ASML, which makes the tools needed to make the advanced chips, or Schneider Electric SE (EURONEXT:SU), which does the power management, crucial for AI data centres?” he says. 

While Europe has world-leading companies, the outlook for its stock markets will be linked to the economy as well.  

The ECB has already cut interest rates once, in June by 0.25%. Inflation is at 2.6% in the eurozone. 

Taken together, Lazard Asset Management thinks that the economic outlook is promising for Europe. 

It says: “This combination of a turn in the interest-rate cycle and signs that the region’s economic activity may pick up from here offers reasons for cautious optimism on the European economy and European stock markets.” 

The fund manager adds that once we pass through the noise of the French elections and the summer period, investors should focus on the nascent good news story within Europe.