The summer holidays are a time where we all like to kick back and relax. However, this summer’s been anything but relaxing for Europe. We’ve seen record highs across the board from interest rates in the Eurozone to scorching temperatures and freak flooding.
Wildfires broke out in Italy, Greece and Portugal to name a few. In total, this cost the European Union (EU) a staggering €4.1 billion in damages.
Extreme climate conditions also hit tourism hard, which is an important industry in Europe. For some countries, it makes up as much as a fifth of all the money they make in a year.
Europe’s summertime sadness has been more than just weather-related though.
Germany, the EU’s economic powerhouse, is struggling.
German exports have dropped and it’s feeling the impact of China’s underwhelming post-COVID recovery – that’s because exports of goods and services to China make up for 3.5% of its GDP.
Germany’s also contending with labour shortages and high energy costs. In July, industrial production, a linchpin to the German economy, fell by 2.1% year on year.
This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.
Eurozone interest rates hit an all-time high
The European Central Bank (ECB) raised interest rates for the 10th time in a row this September. It’s the latest in a series of rate rises which have gone from -0.5% to 4% in just 14 months.
Over the past year rates have been going up for economies across the planet, so why’s this one so significant for Europe?
Well, it’s the highest rates have been since the Euro was first launched in 1999.
And that’s because inflation is proving much stickier than many had expected.
In July, it stood at 5.3% for the Eurozone (the countries that use the Euro) and fell to 5.2% in August. While it’s heading in the right direction, having more than halved since October last year, it’s still well above the ECB’s 2% target.
Will interest rates keep rising in the Eurozone?
It’s hard to tell. The ECB hinted a pause could be in sight towards the end of the year, but of course there are no guarantees.
But, only time will tell if the interest rates introduced so far will be enough to bring inflation back closer to the target.
Rising interest rates make borrowing money more expensive and that means people spend less. When people spend less, the economy can stall and recession fears can start to creep in.
So, are the hikes beginning to bite?
European stock markets did well in the first few months of the year. But there are signs this has fizzled out and the rate rises seen so far are already starting to bite.
The theme in Europe is now one of slowing growth. This month, the European Commission announced it expects the economy to grow less than they originally thought back in May of this year.
It predicted 1% growth in 2023, but now think growth of 0.8% is more likely. And it’s a similar story for 2024, dropping its growth prediction from 1.7% to 1.4%. This means the economy might not recover as quickly as it had initially hoped.
Germany continues to be a spot of weakness for the bloc. It didn't grow at all in the second quarter of this year and shrunk in the two quarters before that. In fact, for 2023 it’s expected to be the only major European economy to shrink in size to the tune of -0.4%.
How have our European Wealth Shortlist funds performed?
Despite a month of ups and downs in August for the FTSE World Europe ex UK Index, it’s done well over the past 12 months and has risen by 15.84%. This is largely thanks to a strong first half of the year.
The latest rate hike in the Eurozone doesn’t look to have impacted stock markets that much. Given interest rates have been high for the past year, economic uncertainty has likely already been factored into share prices.
But, over the long term, share prices usually follow company earnings. So, we think Europe’s attractively priced and it’s worth remaining optimistic – remember though, past performance isn’t a guide to the future.
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, see the links to their factsheets and key investor information below.
CT European Select was the best performing European fund on our Wealth Shortlist over the last 12 months.
The fund returned 17.05% over this period which was ahead of the average return of peers in the IA Europe excluding UK sector by 2.92%*.
Our analysis suggests this was due to two factors. The first being manager, Benjamin Moore’s, ability to add value by choosing good stocks. This in combination with a return to favour for his growth style of investing, boosted the fund’s performance. The fund is relatively concentrated, so each investment could have a big impact on performance, which increases risk.
FIND OUT MORE ABOUT CT EUROPEAN SELECT, INCLUDING CHARGES
CT EUROPEAN SELECT KEY INVESTOR INFORMATION
The worst performing Wealth Shortlist fund was Barings Europe Select. Returns were positive, with the fund up 7.35% over the past 12 months.
Despite being the worst performer on our Wealth Shortlist, it’s held up strongly against its peers who invest in smaller European countries. The focus on small and medium-sized companies does increase risk. Over the past year, the fund has outperformed the average return of the IA European Smaller Companies by 2.58%.
Longer term, this fund has held up better than the broader market when it's fallen. But, it hasn't kept up quite as quickly when the market’s risen.
FIND OUT MORE ON BARINGS EUROPE SELECT, INCLUDING CHARGES
BARINGS EUROPE SELECT KEY INVESTOR INFORMATION
Annual Growth
| Aug 18 to Aug 19 (%) | Aug 19 to Aug 20(%) | Aug 20 to Aug 21(%) | Aug 21 to Aug 22 (%) | Aug 22 to Aug 23(%) | |
|---|---|---|---|---|---|
| CT European Select | 6.49 | 9.26 | 27.58 | -21.07 | 17.05 |
| Barings Europe Select Trust | 0.16 | 3.12 | 30.18 | -24.53 | 7.35 |
| IA Europe Excluding UK | 0.26 | 3.45 | 26.82 | -14.37 | 14.13 |
| IA European Smaller Companies | -7.75 | 8.12 | 39.97 | -25.37 | 4.78 |
| FTSE World Europe ex UK | 4.80 | 0.72 | 27.38 | -11.52 | 15.84 |
Past performance isn’t a guide to the future. Source: Lipper IM, to 31/08/2023.
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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.