Is it time to revisit southern Europe?

I wrote here about how given the cheapness of many of the peripheral eurozone markets, it might be time to start putting in a little money. The markets will probably get cheaper – there’s still too much hope knocking around – but nonetheless, on their current cyclically adjusted p/e ratios the likes of Spain and Italy really don’t look so bad.

Having had that thought last week – and being unwilling to suggest that any of you took the risk of buying only a couple of stocks (who knows how the crisis is going to affect individual companies?) – I started to look for a good fund to suggest.

It wasn’t easy. We’ve often complained about consensus investing among the big fund managers and the lack of really active thinking or trading among the managers we all pay to be active. But look at the top holdings of the big European managers and you will really see what we mean.

They are all heavily invested in the north of Europe. They are all almost entirely absent from the south. They all hold Nestlé. They all hold Unilever. They all hold Sanofi. They all hold SAP. And so on. There is an astonishing lack of diversification.

Now, Nestlé and Unilever aren’t bad companies. Far from it. But it just doesn’t seem quite right that everyone has them. I asked one top performing European manager about it. He didn’t see it as a problem. Take Nestlé he said. It is 5% of the benchmark (there’s a clue as to why managers judged against the benchmark like to hold it here…); it has almost no debt; it can borrow at almost zero should it want to; input prices for its products are falling; it pays a 4% dividend; and if the euro keeps weakening, it will see profits upgrades as dollar earnings are translated back into euros.


That seems entirely reasonable. But I noted afterwards – running through our emails – that there had been no mention of price, the point being that great companies can very easily become expensive stocks.

Then I asked Chris Rice, the manager of the Cazenove European Fund. He rather agrees that some of these favoured stocks are overbought and overpriced – he sold Unilever and Nestlé last week.  Time, he says, to take a look at the likes of Axa and Renault instead.

Finally I spoke to the mostly nice people at Hargreaves Lansdown who provided me with a list of the European funds with the most exposure to the peripheral eurozone markets for those of you who are interested (see below).

Subscribers can read more on this in this week’s magazine, out on Friday.

Fund Exposure
SVM Continental Europe A 28.58%
GLG Esprit Continental Euro Ret Acc 23.74%
Artemis European Growth R Acc 22.91%
JPM Euroland Equity A Acc EUR 21.91%
BNY Mellon Small Cap Euroland A EUR 21.43%
Standard Life Inv European Equity Growth Ret Acc 20.30%
Standard Life Inv European Ethical Equity Ret 19.02%
Invesco Perpetual European Equity Acc 18.67%
BGF Euro-Markets Fund A2 EUR 18.48%
Franklin European Small-Mid Cap Growth A (acc) EUR 17.63%