On Friday June 24, the FTSE 100 plunged 10%, dragging down markets across the globe with it as the world digested news the UK had voted to leave the European Union. But the pain was short-lived, just one week later the majority of investments had rallied to regain their losses – and kept on climbing. In the second half of the year, thanks to sterling devaluation, saw the FTSE 100 hit several all-time-highs.
Despite the significant rally in domestic stocks, investors may be surprised to know it was not UK equity funds which have been the best performing 10 months on from the Brexit vote.
Neptune European Opportunities has been the strongest gainers of all funds since the EU referendum, according to data from Morningstar Direct. The fund has gained 56.1% since June 24.
A number of emerging market funds followed closely behind the fund, especially those that invest in Asian equities. They are Baillie Gifford Greater China, which has gained 46% since June 24, and Bronze Rated Neptune Russia & Greater Russia, which has gained 47%. Baillie Gifford Emerging Markets, Neptune Latin America, Bronze Rated Invesco Perpetual Asian and Bronze Rated Jupiter India all rallied more than 40% since the Brexit vote as well.
Japan funds are also among the top performers, as Gold Rated Man GLG Japan CoreAlpha and Henderson Japan Opportunities both gained 41% since the Brexit vote.
What Next for European Equities?
European equities produced an exceptional ‘relief rally’ after the result of the Dutch election, said Dan Kemp, chief investment officer at Morningstar Investment Management. While in March the broad European region delivered just over 4% in US dollars, the real winners were in Spain and Italy which delivered 10% and 9% respectively, said Kemp.
The global and European economic environment is improving markedly in ways that are set to benefit European companies, said Michael Bell, global market strategist with JP Morgan.
“It’s already better than you think in Europe; the unemployment rate has fallen rapidly, and trends in retail sales and industrial production are also positive, while business survey data is at the strongest it has been for the past six years at levels that have historically been consistent with real GDP growth of more than 2%”, said Bell.
Neptune European Opportunities currently holds a Neutral Rating by Morningstar analysts. Looking at top 10 holdings of the fund, the majority of them are banks, data from Morningstar Direct showed. These include French banks BNP Paribas (BNP), Credit Agricole (ACA) and Societe Generale (GLE), Norwegian bank DNB ASA (DNB) and German bank Deutsche Bank (DBK). The Euro Stoxx bank index has risen 49% since the Brexit vote.
John Bennett, head of European equities for Henderson previously told Morningstar that banks are “the most difficult thing to own in Europe”, however he has conviction on Nordic banks.
The Neptune European Opportunities fund has not done enough to remain a strong choice for investors, said Muna Abu-Habsa, a fund analyst for Morningstar.
“The majority of the fund’s outperformance was amassed in the early part of the fund manager Rob Burnett’s tenure from 2005 to 2012. Since 2012, the has manager struggled to keep pace with the risk-on and risk-off market movements and returns suffered from a number of US-listed stocks that Burnett had ventured into,” said Abu-Habsa.
“On a risk-adjusted basis the fund is behind peers. While we acknowledge Burnett’s experience in European equities, we no longer have conviction in his ability to add value over the benchmark in a meaningful way.”
Emerging Markets’ Positive Outlook
The MSCI Emerging Market Index gained 11.4% in the first three months of 2017. The outperformance is fuelled by a pick up in global trade, said David Stubbs, global market strategist with JP Morgan.
“Asian is a commodity importer, sensitive to global trade, and it is two-thirds of the emerging market sphere, so that’s where you start delivering earnings- that powers the outperformance. The outperformance is going to continue and if people want to sell out of the US, Asian equities will be high on their agenda,” said Stubbs.
Morningstar analyst Lena Tsymbaluk said top performer Invesco Perpetual Asian remains a strong choice within the Asia-Pacific ex-Japan peer group.
“William Lam will become sole manager of Invesco Perpetual Asian on May 1 2017. He became comanager alongside Stuart Parks in April 2015 and has been part of the Asian equities team at Invesco Perpetual since 2006. Parks had been involved in management of the fund since 2005 and will retain lead management responsibilities for the Irish-domiciled Invesco Asian Equity,” said Tsymbaluk.
Although there is no particular style bias within the team’s approach, the fund has typically favoured steady large-cap franchises and market leaders in Asia such as Samsung Electronics, Tsymbaluk added.
