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Look beyond the headlines for growth in Europe

Europe's economic growth is uninspiring, but some great companies are listed there
March 5, 2020

European economic growth is uninspiring and the region faces fractious political headwinds. Europe’s economic powerhouse, Germany, has come close to a technical recession – two consecutive quarters of economic decline – in as many years. Wider eurozone gross domestic product (GDP) growth was 2.4 per cent in 2017, but research company Capital Economics estimates that it fell to 1.2 per cent in 2019 and will only grow by 0.7 per cent this year. Negative interest rates set by the European Central Bank (ECB), meanwhile, have made it difficult for commercial banks to make money. As a result, some companies included in broad European indices are struggling to grow. 

“Don’t buy an index tracker fund if you are investing in Europe,” says Ben Yearsley, director at Shore Financial Planning. He believes that broad European equity indices include “moribund, dying businesses” in out-of-favour sectors such as banking, oil, telecommunications and utilities. But he adds that there are pockets of Europe equities that offer strong growth potential, and managers of active European equities funds could pick these out.

Stephen Paice, manager of Baillie Gifford European Fund (GB0006058258), has analysed 10-year rolling returns over the past 30 years in the US and Europe (ex UK), and concluded that the probability of picking a big winner was about the same in each region. He says that the chance of finding a company of which the share price at least quadrupled over a 10-year period was roughly 15 per cent in both regions. However, the investment opportunities and types of company available in each region are quite different.

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