Two Funds for a European Rebound

07/16/2013 8:00 am EST


In The Outlook, Vaughan Scully of S&P Capital IQ looks at two top-ranked European equity funds poised to benefit from a European rebound.

Europe has been a sinkhole for global economic growth for several years now, weighed down by heavy governmental debt loads, fiscal austerity programs, a weak banking industry, and political squabbling over how to deal with insolvent members of the euro.

That may be changing, however. While economists still expect the European Union to experience a net economic contraction in 2013, as it did in 2009 and again in 2012, the second half of 2013 is expected to begin a period of stronger activity that should lead to a resumption of growth in calendar 2014.

Hopeful signs include the Eurozone Composite Purchasing Managers Index—which rose to 48.9 in June—close to the 50 reading that indicates economic expansion.

Other indicators—stronger job growth in Sweden and the UK, a rebound in French industrial production—are also pointing to improved conditions in the not-so-distant future.

“We believe an inflection point has been reached and a more positive picture is starting to emerge,” says Rob Quinn, S&P Capital IQ chief European equity strategist, of Europe’s moribund economy. “In the absence of a negative shock, the region is heading towards stabilization.”

“We have greater conviction in an earnings recovery, excess liquidity is still supportive to equity markets contrary to popular perceptions, and we expect easy monetary conditions to facilitate an additional 10% multiple expansion for the remainder of this year.”

For US investors seeking exposure to a rebound in Europe, S&P Capital IQ’s MarketScope Advisor finds just two European equity funds that are open to new investors, not intended for institutional investors and have its highest five star rank (S&P's top buy rating).

The larger of the two is the T. Rowe Price European Stock Fund (PRESX), a no-load fund that earns positive scores for its strong three-year performance, its high risk-adjusted return, its low annual expense ratio, and lack of sales load.

As of March 31, it had 79 holdings, with financials the largest sector exposure at 23.5% as of April 31 followed by consumer discretionary (20.1%) and industrials (14.9%).

On a country basis, it had 21.4% of assets invested in UK-based companies, 15.7% with French companies, and 14.8% in Spanish stocks. Its top holding as of May 31 was Anheuser-Busch Inbev.

The other is the Invesco Europe Small Company Fund (ESMAX), which earns its five-star ranking for its strong one-year and three-year performance records, long manager tenure, low volatility, and strong risk-adjusted returns.

Its cost factor score is negative, however, due to a 5.5% front-end sales load. The fund’s portfolio has a weighted mean market capitalization of $740 million.

Its top holding is Yazicilar, a Turkish holding company that owns majority stakes in beer, soft drink, automotive, financial service, and retail companies.

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