European peripheral countries such as Portugal are growing faster than they would had they not signe...
European peripheral countries such as Portugal are growing faster than they would had they not signed up to the euro, says Nick Thomas, investment manager at Baillie Gifford.
Thomas says this is the reverse of expectations of the post-euro situation, when it was predicted Germany would take a central role in tightening the fiscal policies of these countries.
Rather, it is now Germany that has big economic problems because of the fiscal limitations imposed on it with the introduction of the euro. Thomas says the cap imposed on countries' ability to control their own interest rates has restricted Germany's ability to get out of an economic hole.
He says: 'The introduction of the euro has highlighted some of the country factors that still exist when investing in Europe, as it has had to confront its domestic limitations more.'
Adrian Fowler, head of European equities at Aberdeen Asset Management, says there has been a structural shift over the past five years with there being more awareness of what is going on in individual countries.
He says the problems in Germany have made people aware of country-specific issues and have made them check their country weightings.
Fowler says: 'The fact there are still unilateral events that create big difficulties for the rest of the euro area should underline that people cannot forget about countries when it comes down to asset allocation.'
While Fowler says his asset allocation is on a sector and stock basis, he still monitors country weightings. Aberdeen is 20% underweight in Germany and overweight in France, the Netherlands and Ireland.
At a sector level, Fowler is keen on media since the negative view of next year's advertising spend has been overdone and valuations are relatively attractive. In fact, he says, companies are set to maintain or increase advertising spend.
Adriaan de Mol van Otterloo, manager of the Schroder European Fund, is also overweight in the peripheries and underweight Germany and France.
He says: 'I do not take much of a country-style investment, it is just basically the result of the stock ideas we generate internally. What it does highlight is that the macroview in Germany looks quite awful and it is very difficult from our stock selection point of view to find good stock ideas there. France is relatively the same even though the macro outlook is slightly better than Germany.'
Thomas says investing in Europe has always been done on a country level at Baillie Gifford, as he says it offers better comparisons to examine.
He is slightly overweight in France and underweight in Germany because the big index constituents are banks and insurers, both of which he is underweight in.
Although banks and insurers are weak in Germany, Thomas says banks in Spain look good because of low interest rates and high inflation, a good environment for banks as opposed to the deflationary environment Germany is facing.
Thomas says there are big differences in inflation rates across Europe. Germany's is at 1.4%, while Portugal's is 5%.
He says: 'Countries with higher inflation are more attractive as it gives pricing power to the domestic corporates. Deflation is the biggest risk to economies at present so high inflation is not a bad thing.'
Good growth in peripheral countries.
Banks in some countries attractive.
Advertising spend may increase next year.
Germany's macro outlook is poor.
Germany unable to control fiscal policy.
Deflationary risk has risen.
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