The Briefing: Europe

Europe has barely been out of the headlines this year with a debate raging over the potential effect on investment markets of Greece's long-running debt crisis and question marks over the longer-term viability of the euro.

For anyone who has followed the region for a while, this is nothing new. In fact, it's hard to remember a time when investors didn't have to wrestle with a wide variety of challenging economic and political issues.

However, despite the negative sentiment around the eurozone, many European companies have performed well, made profits and have large amounts of cash on their balance sheets, points out Patrick Connolly, a certified financial planner at Chase de Vere.

"Europe is an incredibly important part of the global economy and hosts many top quality companies with good growth prospects," he says. "This is why European shares should have a place in virtually every investment portfolio."

Is this the right sector for me?

Consider investing in this sector if...

• you believe Europe will continue to offer strong returns
• you want exposure to large European brand names
• you are looking to diversify your portfolio

It should also be noted that European companies earn about half of their revenues from outside of the eurozone, he points out, so while the fortunes of European economies play a part, so do wider global issues.

"It is important to disconnect economic prospects from stockmarket prospects, though," he argues. "Despite the poor economic outlook, Europe is home to many successful businesses with global earnings… We continue to believe Europe is an attractive region in which to invest, with plenty of quality fund managers to choose from."

Large and fast-growing companies

There's no disputing that the economic backdrop in Europe has been poor for a number of years with the peripheral nations struggling with debt, unemployment and uncompetitive economies, according to Mark Dampier, head of research at Hargreaves Lansdown.

"It is important to disconnect economic prospects from stockmarket prospects, though," he argues. "Despite the poor economic outlook, Europe is home to many successful businesses with global earnings… We continue to believe Europe is an attractive region in which to invest, with plenty of quality fund managers to choose from."

Even a cursory glance at the holdings of some leading funds illustrates the point. The Aviva Investors European equity fund, for example, contains global powerhouses such as Unilever, which produces a host of well-known home and personal care products.

Its top 10 holdings also includes pharmaceutical giant Bayer, agriculture company Syngenta, Schneider Electric, the energy management specialist, Sanofi, the healthcare group, and software company SAP.

Statistics compiled by the Investment Association appear to show that investors are beginning to look past the economic turbulence and focus more on the fact Europe is full of large and fast-growing companies, which are capable of making money.

Best-sellers

This new-found enthusiasm has meant European equity funds have been the best-sellers for three consecutive months - March, April and May 2015 - according to the most recently published data from the Investment Association.

For those wanting in on the action, there are more than 100 funds in the IA Europe excluding UK sector from which to choose, and a further 20 in the IA European Smaller Companies sector. However, it's a serious mistake to believe that all European funds are the same.

The reality is there are huge differences in terms of the number of stocks held, the amount of divergence from European benchmarks, the types of companies they invest in, and even whether they are aiming to achieve growth, income, or a combination.

These differing approaches - along with the success rate or otherwise of the manager at the helm - can result in vastly different returns. Over the past year, for example, the best funds in IA Europe excluding UK have made more than 30%. The worst have lost money. "This demonstrates why it is important that investors fully understand the funds they're investing in, including the approach and risks they take," adds Connolly, who likes JPM Europe Dynamic, BlackRock European Dynamic and Threadneedle European Select.

What is likely to happen in the future?

Investors have been rewarded for their support, with IA European Smaller Companies being the second best performing sector this year with a return of 13.8% - just below the 14.1% of Japan, according to Morningstar figures to 31 July 2015.

So what is likely to happen in the future? Although future movements across investment markets are notoriously difficult to predict with any degree of accuracy, observers suggest accommodative monetary policies should be beneficial to shares.

However, it's also worth bearing in mind that stockmarkets have already risen significantly, which has pushed up stock prices. As a result, most analysts are hoping to see an improvement in company earnings over the coming months to justify the higher valuations.

It's also fair to say the jury is still out on the subject of how successful quantitative easing will be, with the recent problems in Greece demonstrating just how vulnerable the eurozone could still be to further economic or political shocks.

Europe as a region certainly offers plenty of potential for those with longer-term investment horizons but there are also many potential downsides to consider, agrees Julian Chillingworth, chief investment officer at Rathbones. "It's not yet one economy, so you need to be quite disciplined about where you put your money," he says.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.