Good time to invest in Europe? 3 fund ideas

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Interest rates are a particular concern. As investment director Tom Stevenson explains in his latest outlook, Europe has benefited from a sharper fall in interest rates than other major markets - but with inflationary pressures back on the radar, rates look more likely to rise.

The investment case for Europe is not straightforwardly negative, however. The geopolitical backdrop is very volatile and trends that took hold last year - for example, the rotation out of US stocks into Europe - could easily start again. Amid such uncertainty, a diversified pension or ISA is more important than ever.

This requires a bit of planning, given Europe (excluding the UK) only represents about 13% of a standard global tracker fund. You can check your exposure with our X-ray tool, which we explain here: tools that can make you a better investor.

Sector winners and losers

Studying the performance of a single European benchmark - such as FTSE World Europe or STOXX Europe 600 - is of limited use at the moment. This is because there are some big discrepancies between sectors.

Energy companies are having a very successful period. On average, they are up by a third since the start of the year. This figure includes everything from upstream oil and gas producers to downstream refiners. Some companies have reduced or stopped production in the Middle East in response to the closure of the Strait of Hormuz, but analysts think higher oil prices will more than offset this.

In contrast, consumer stocks are struggling. The luxury sector has taken a particular knock, with the likes of Hermès, Kering and LVMH warning that the conflict is weighing on demand. This due to a slowdown in tourism both to and from the Middle East, and fewer airport sales.

When deciding where to invest, therefore, thinking about sectors is very important. Broadly speaking, Europe is skewed towards banks, manufacturing and engineering, and offers significantly less technology exposure than the US.

Cheap or expensive?

Another thing to consider is valuation. Over the past decade, the valuation gap between the US and Europe has widened. The region now trades on a price/earnings ratio (P/E) of roughly 15 times, while the US trades on 21 times.

• Read: What is the price-to-earnings ratio and how do you calculate it

From this angle, Europe looks intriguingly cheap. However, it is important to realise that P/E multiples reflect how fast investors expect markets to grow.

A more useful metric is arguably the PEG ratio – P/E’s more sophisticated cousin. PEG takes a company’s PE ratio and divides it by expected earnings growth. In other words, it tells investors how expensive a stock is relative to how fast it is expected to grow. On this basis, Europe looks like less of a bargain. Its PEG ratio is roughly in line with the US at 1.4 times.

Dividends are another big consideration - and one of Europe’s main attractions. The region currently yields 3.4% versus America’s 1.4%.

^{Source: FactSet, 27.4.26}

How to invest in Europe

Lots of funds, investment trusts and ETFs (exchange-traded funds) focus on Europe, but too much choice can be overwhelming. Our Select 50 list narrows down the options. Here are a few for you to consider.

Barings Europe Select Trust

This actively managed fund invests in smaller companies, where it thinks the best growth opportunities are. It is managed by one of the most experienced teams in the sector and they have worked together for a long time.

Given its focus, the fund is at the riskier end of the spectrum and is likely to require a long investment horizon of ten years or more. Much like the wider market, the fund is heavily exposed to industrials and financials, but few of the holdings are household names.

• Read fund information for Barings Europe Select Trust

Schroder European Recovery Fund

This fund is laser focused on finding cheap stocks. It hunts for companies that are “significantly undervalued” relative to their long-term earnings potential and is heavily skewed towards the consumer discretionary sector.

The top holdings of this fund include some of the biggest companies in Europe, including Dutch bank ABN Amro and BNP Paribas of France. French pharma giant Sanofi is also in the top 10.

Because the fund takes a value approach to investing, it would likely blend well with the Barings Europe Select Trust.

• Read fund information for Schroder European Recovery Fund

Vanguard FTSE Developed Europe ex UK

This is a passively managed fund. With an annual fee of just 0.1%, is a very cheap way to get European exposure. Passive funds track an index, avoiding the cost of employing a fund manager to select shares. The fund has several hundred holdings with Louis Vuitton (LVMH), Nestle and Siemens among its top 10.

• Read the fund information for Vanguard FTSE Developed Europe ex UK

If you’ve got a burning question you want to ask, why not drop us a line? Ask us your question.

• See more Select 50 funds selected by experts
• Read: Top 10 best-selling ISA and SIPP funds this year
• Read: Investing in the UK stock market: 5 British ISA fund ideas