Monday 11 December 2017

Could you double your money by buying European shares?

Negotiating the investment highway
Negotiating the investment highway
Louise McBride

Louise McBride

Investors in European shares could double their money if Mario Draghi's plan to get Europe back on its feet works - as long as they choose the right shares and are prepared to wait a few years. Some shrewd investors in US shares are now in this position - about six years after a similar move was taken by the US central bank, the Fed.

Ten days ago the European Central Bank president pressed the button to start printing money. The move was taken to stimulate economic recovery, boost consumer spending and raise inflation in Europe.

In November 2008, the Dow Jones Industrial Average, which includes some of the biggest stocks on the New York Stock Exchange, stood at 9,320. In late November 2008, the US central bank, the Fed, started the first of three rounds of money printing. Today, the Dow stands at 17,678. Of course, this can't all be put down to the Fed's decision to print money and many believe these programmes didn't work as expected.

However, stock markets often do well out of quantitative easing - the term used to describe a central bank's decision to print money. Indeed, the shares of many large European exporters and multinationals soared after Draghi announced his stimulus package late last month - largely because QE sent the euro into free fall, which ultimately put those firms in a stronger position.

So have I already missed the boat?

No. "European shares are still trading at a big discount to the US when you look at long-term earnings," says Ian Quigley, director of investment strategy at Investec Wealth & Investment Ireland.

"If earnings improve in Europe, investors could do quite well from European equities."

Which European shares should I buy?

Spanish shares could be worth having under your belt if QE works, according to David Coombes, head of multi-asset investments with the British fund manager, Rathbones.

"The Spanish market will outperform others if QE is successful," says Mr Coombes. "So if you believe QE will work, buy a Spanish exchange-traded fund (ETF - essentially a basket of shares). Stocks like Telefonica could do well too." One Spanish ETF that could be worth considering is the iShares MSCI Spain Capped ETF.

German exporters too will benefit from QE if it works - because the euro is likely to continue to fall. "So the shares of large German exporters, such as Siemens, BMW or Adidas, could do well," says Mr Coombes.

A weak euro isn't the only reason some big European companies could do well out of QE. Unilever and Pernod Ricard are among those well-positioned to benefit from an economic recovery in Europe - and their shares could be worth buying as a result.

The insurer Allianz, pharmaceutical giant Bayer and the chemical company BASF are among the shares being tipped by Davy.

Should the shares of large European companies be already out of your price range, consider investing in smaller domestic-oriented companies.

"If all this ECB policy action gets a bit of reflation, financial and construction companies should benefit," says Mr Quigley. "Banks may also do well if things improve - but banks are more complex. Any investments with good sustainable sources of income in Europe will benefit from the ECB move - so equities or property should be reasonable places to be."

Choose your shares wisely, however. "QE seems to be clearly positive for the shares of European banks, autos, industrials and construction companies, all of whom would benefit from a strengthening euroland economy and/or weakening euro," says Pramit Ghose, global strategist with Davy Asset Management. "On the other hand, sectors that could lose out are the more defensive or less cyclical sectors such as utilities, consumer staples (such as food and beverages) and pharmaceuticals."

What about equity funds?

A European equity fund which isn't exposed to any further weakening of the euro would be worth buying into, according to Jason Hollands of the British investment broker, Bestinvest.

"We know from the experience of such massive stimulus programmes elsewhere that QE puts downward pressure on the currency," says Mr Hollands. "There's a strong case therefore for investing in European equity funds that hedge the currency exposure so that you benefit from rising share prices which aren't exposed to any further slide in the euro. Very few funds offer this feature - one we like is the Artemis European Opportunities I Hedge fund, which converts currency exposure into British pounds."

Those who expect QE to work and who are prepared to take on the currency risk could consider a fund which invests in small European companies, says Mr Hollands.

"Smaller EU firms provide greater exposure to the domestic Eurozone economy, which should also benefit from lower energy prices, as western Europe is a major net importer of oil and gas," says Mr Hollands. "Here we like the Baring European Select fund."

What shares should I invest in if I don't believe Draghi's plan will work?

Many investors in European shares will get burned if QE doesn't work. German shares however are still worth investing in if QE fails - but not those of German exporters, according to Mr Coombes.

"If QE does not work, domestic-facing German stocks which are less reliant on a cyclical recovery should do well," says Mr Coombes. "That would include German telecommunications companies, domestic retailers and so on. British and Swiss stocks could also do well. However, French, Spanish and Italian shares would do poorly. "

Mr Coombes, who does not expect QE to work in Europe, has more confidence in US shares.

"To get recovery in Europe, we need to see lower taxes and bigger public spending cuts across the whole of Europe instead," he says. "QE in Europe is about four years late. Given how low interest rates already were and are, I'm not convinced that QE will find its way into people's wallets."

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