By Robert Maharajh Offshore funds investing in Europe ex-UK are showing higher than average returns ...
By Robert Maharajh
Offshore funds investing in Europe ex-UK are showing higher than average returns at the cost of higher than average volatility. The best total return over the three-year period examined was achieved by the Newton UGF Continental Europe fund. This has returned 115.19% over three years to the end of July 1999, which breaks down as -0.9% over one year, 52.54% from August 1997 to July 1998 and 42.35% from August 1996 through July 1997
The portfolio is managed by Keiran Gallagher, who characterises his investment stance as 'growth at a reasonable price'. The fund's largest overweighting at present is in the consumer services and retail sector, reflecting a belief that consumption will strengthen. Gallagher said: "Not only is the sector benefiting from buoyant consumption but it could also become the focal point for a wave of pan-European restructuring
"Europe's retailers are increasingly likely to move outside their domestic markets. A comparison between the European retail sector and its Asian or US counterparts suggests Europe could be ripe for consolidation
"The other key overweight is telecoms. Our preference for these stocks is long-standing and over the past 18 months the sector's performance has made a positive contribution to the fund. We believe there is still much to play for. There are three key factors in the sector's favour the digitalisation of telecom services in Europe, the phenomenal growth of mobile phone usage and the growth of the internet and the resulting increase in data carriage." The fund is underweight pharmaceuticals, consumer staples and tobacco. A significant portfolio shift in the second quarter of 1999 was a major increase in exposure to the German market, up from 15% to 25
Gallagher said: "This increased weighting is on the back of the corporate tax plan proposed by the new German finance minister. The proposal, which should take effect from January 2001, will effectively cut the tax rate for German corporates from 55% to 35%. A German broker has already done some work on the impact on the corporate sector and has suggested the earnings of some companies could increase by 40%. We are doing work in-house to assess the impact of these proposals
Gallagher said he is reasonably optimistic about the outlook for European markets. He said: "Stocks are fairly valued relative to bonds. There has been good news on the earnings front with a spate of recent upgrades
"Given the disappointing performance in the first half of this year, European markets could start to play catch-up in the second half. The valuation of the US equity market remains the key risk factor
"Where possible we have tried to protect the portfolio from the effects of a US correction, hence our caution in relation to tech stocks and internet-related issues in particular
"Longer-term, we expect at least a couple more years of exciting times in Europe. Widespread restructuring will continue and the pace of cross- border merger and acquisition activity is hotting up. Indeed, the single currency is changing the face of European business. Many deals currently in the pipeline would have been unthinkable just a few years ago
Another fund with a strong performance record over the three-year period is the Hill Samuel OS European. This has achieved a total return of 102.19% over three years to the end of July 1999. This breaks down as 2.03% over one year, 40.24% from August 1997 to July 1998 and 41.3% from August 1996 to 1997
David Kiddie, head of pan-European equities at Hill Sam-uel, said: "We remain marginally less optimistic than the consensus for growth and expect slightly lower inflation for both this year and 2000
"Any growth surprise will be on the upside but any inflation surprise will be to the downside. We expect the ECB to maintain a 2.5% repo rate. Equities continue to offer upside as corporate profits are sustained
"Low economic growth has been offset by continued cost reduction and lower bond yields support valuation levels
Kiddie said economic growth is picking up in France and Spain, with consumers in the latter benefiting from lower interest rates and continued strong investment
In Germany, the IFO business survey posted a surprisingly strong recovery in July to 92.9. Other indicators, such as export orders and expectations, are also showing that the worst may be over in Germany. Kiddie said: "On the other hand, consumer confidence in Germany has fallen from its recent peak, which was probably unjustified in the first place"
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