Europe and Japan should be this year’s destinations of choice for Isa investors, say City experts who are convinced that monetary stimulus in both markets will boost share prices and fund returns. While the UK and US authorities are winding down their quantitative easing (QE) programmes, in the eurozone and Japan they are in their early stages.
Marcus Brookes, head of multi-manager at Schroders, says: “There would appear to be greater upside potential in Europe than the US. The Japanese market has similar dynamics to Europe, with an accommodative central bank and relatively attractive valuations.”
The European Central Bank started buying sovereign bonds this month in an attempt to revive the eurozone economy. In anticipation, investors have become significantly more positive on the outlook for Europe’s profits. Stephanie Flanders, chief market strategist for Europe at JP Morgan Asset Management, says: “In absolute terms, earnings are still not massively strong, but are up on a relative basis compared to a year ago. Analyst expectations are being revised up for the first time in four years and the numbers have been encouraging, partly because of the weaker euro.”
The prospect of QE has helped to propel government bond yields into negative territory, which may help European equities in two ways. First, shares offer better income returns than the bond market. The Euro Stoxx 50 index has a dividend yield very similar to that of the FTSE 100, at 3.5 per cent. Second, it is good for profitability as companies can save money by refinancing their debt at today’s rates.
To access Europe, Michael Paul, fund analyst at the stockbroker Brewin Dolphin, recommends Neptune European Opportunities. For investors who prefer tracker funds, Shaun Port of Nutmeg recommends the UBS MSCI EMU 100% Hedged to GBP ETF.
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Japan started its monetary stimulus programme in April 2013 and accelerated it last October. Jason Hollands, of Tilney Bestinvest, says: “Japan continues to be one of the developed world equity markets with significant potential for further gains.”
He recommends GLG Japan CoreAlpha Equity I H GBP. It provides access to blue-chip Japanese giants such as Nintendo, Honda and Sony, but hedges the exposure to the yen. If you buy a non-hedged fund that invests in Japanese stocks, the fund has to convert sterling to yen to purchase the underlying investments. If the yen weakens, this will reduce the fund’s return even if the underlying stocks are unchanged in yen terms. As a British investor you can lose money when stock prices rise. Hedged versions use derivatives to eliminate the forex effect.