Like its global peers, European equity markets have been impacted by a range of macroeconomic events and the MSCI Europe Index declined by 17% from peak to trough in sterling terms during 2015. Encouragingly, data suggests it is not all doom and gloom: the International Monetary Fund’s economic forecasts for Europe have been revised upwards for 2016, while those for the US have fallen. Furthermore, unemployment is falling and disposable incomes are rising. The European Central Bank has also demonstrated its willingness to pull out all the stops to kick start the economy, including expansion of its bond buyback programme and reducing interest rates to historically low levels.
However, discounts at which European investment trusts’ shares are trading to their net asset value have widened to 5%. Clearly, a significant contributor to this weakness has been the uncertainty surrounding the upcoming UK/EU referendum and the future of the 28-member bloc as well as the resultant swings in currency. According to the Investment Association, Europe was the most sought-after sector in 2015 with net inflows of £4.4bn, compared with £221m in 2014. With disappointingly sluggish returns year-to-date when converted into sterling, investors have withdrawn a net £406m within the first three months of the year.
The issues currently affecting European funds are macroeconomic in nature and even those funds with excellent long track records have been indiscriminately impacted. Interestingly, such scenarios can spell opportunity for long-term investors.