Continental drift

By Daily Mail Reporter
Updated: 19:00 EDT, 24 October 2002

EUROPE was supposed to be the next gold mine for investors as companies would merge, cut costs and make whopping profits.

Figures from credit rating agency Standard & Poor's show that an investment of £1,000 in the average UK shares fund at the beginning of the year would be worth £750 now.

The average Japan/Far East fund has done better, with £852 remaining. But if that money had been in Europe, you'd have only £700. The US Latin America and technology were the only places worse to be.

Many British investors are over-exposed to Europe since the days of tax-free Peps, which restricted most investment to the UK and Europe.

The trouble with Europe is that the promised merger activity - where it did happen - was unsuccessful, creating losses rather than gains, says Raj Shant, head of Europe at fund managers Newton. Meanwhile, the core economies - Germany and France - are in or close to recession and little can be done about it. Strict labour laws in France and Germany make it difficult to fire staff, so companies can't easily cut costs when times are hard. And politicians are unwilling to make changes.

As Leon Howard-Spink, fund manager at Jupiter, says: 'The German government is propping up failing industries. Capital is being invested where it is not getting a return, which depresses the creation of wealth for everyone.'

The economies are further hobbled by the European Central Bank (ECB), which sets a single interest rate for the whole euro zone, he adds. While Germany is crying out for a reduction in rates to stimulate its economy, the ECB won't do so because lower rates would send the successful European economies - Spain, Ireland and Italy - out of control.

Mr Shant says the short-term outlook is 'not very cheerful', but adds the situation is not all bad. He says: 'Germany has lived with high taxes, a strong currency and strict labour laws for years, and it has still built itself into one of the richest countries in the world. People have written off Europe before - particularly in the early 1980s - and it wasn't the right thing to do.'

However, Jupiter's Howard-Spink says even the long-term outlook for Europe is 'pessimistic' - although he stresses that there are still firms around that are good investment opportunities.

So should investors throw in the towel now? Ben Yearsley, at independent financial adviser (IFA) Hargreaves Lansdown, says they would do better to diversify their investments properly rather than sell out. 'Europe has been more volatile than emerging markets this year. It shows the danger of over buying a particular area,' he says. 'It is more sensible to rebalance a portfolio than to try to guess where the next rally will come from. You really need a foot in every camp.'

Gavin Haynes, at IFA Whitechurch Securities, suggests that a proper spread for a medium-risk shares-only portfolio should be 50% UK, 20% Europe, 20% US and the rest split between Japan, the Far East and any specialist areas.

But he says transferring savings takes time and can involve selling and rebuying some weeks later. With the market so jumpy, investors could miss a big rally while they are out of the market.

Doctor Jayendravadan Reddy, 61, has about £5,000 invested in the Jupiter European Special Situations fund. It is part of a larger investment with Jupiter he started in 1997, split between several other funds, including UK Growth and High Income.

He is hoping the stock market will recover in a couple of years because he wants to use the money to top up his pension income when he retires. Dr Reddy, from Burnley in Lancashire, says: 'The markets won't recover very quickly, but they should do eventually. I'm more worried about my children's pensions than mine. I must encourage them to start putting money away.'