During the latter half of the 19th century, the Ottoman Empire—now Turkey—was called the “sick man of Europe.” These days, it wouldn’t be a stretch to call Europe the sick man of the global economy. For starters, the continent’s broader economy has been snoozing since the financial crisis. And it doesn’t help that its poor demographics, characterized by an aging population, don’t portend robust future growth. Throw in government bonds offering negative yields, the potential mess that is Brexit and the possible negative impact of trade wars on European exports—along with the troubles of the eurozone’s third-largest economy, Italy—and it’s little wonder that some investors equate the E.U. with “P.U.”

But is Europe really that bad? Actually, no. It does have some compelling investment opportunities, but you need to know where to go to find them. “You have to look at it on a country-by-country basis,” says Stephen Kusmierczak, portfolio manager of the Columbia Acorn European Fund. “It is a continent, and conditions vary across countries.”

Kusmierczak’s fund has successfully identified winning trades this year, having returned 22.7% through August 8. The boilerplate description in the fund’s literature says it focuses on small- and mid-cap European companies with growth potential.

Translation: Kusmierczak generally avoids companies with heavy exposure to European consumers because, he notes, consumers are stressed in many parts of Europe. Plus, Europe generally is an older market that’s not skewed to a consumer demographic.

“We’re trying to identify really good companies that provide exposure that’s outside of Europe,” Kusmierczak says. “These companies have strong operating performance over long time periods. And they’re often in certain niches that are largely dominated by European companies, especially in industrials.”

As of this year’s second quarter, his fund’s top holding was Sectra, a Swedish company that focuses on medical imaging technology and cybersecurity. That was followed by Nemetschek Group, a German supplier of software aimed at the entire life cycle of building or infrastructure projects from design to construction to maintenance. The third-largest holding, Belimo Holding Ag-Reg, is a Swiss maker of heating, ventilation and air conditioning systems.

Beyond the prerequisite of a holding having strong operating performance, Kusmierczak also puts a strong emphasis on a company’s corporate governance, believing a firm’s culture and processes are key determinants of its long-term success. “We want companies to be in industries with good tailwinds that are durable, but we also look at corporate governance and the values behind the company,” he says. “We’re not trying to be overweight the U.K. or Sweden; those countries just happen to be—particularly in the corporate governance dimension—where we find more of these companies.”

He adds that the region comprising Germany, Switzerland and northern Italy is home to industry leaders with good corporate governance. “Some of the Czech and Polish manufacturers also fit into that group,” he says.

To Kusmierczak’s thinking, Italy exemplifies both sides of the coin regarding investing in European equities. While he praises the high-tech, advanced manufacturers found in northern Italy, he posits that the country as a whole is lacking.

“Since the financial crisis, Italy hasn’t undertaken the labor reforms that we’ve seen in Spain, for example,” he says. “Spain has implemented a lot of labor reforms to make it a more interesting place for manufacturing.”

Negative Yields

Following the 2008 global financial crisis, major central banks around the world—including the Federal Reserve, Bank of Japan and European Central Bank—took drastic measures to revive their economies with ultra-low interest rates and bond-buying programs. This boosted bond prices and, correspondingly, pushed down government bond yields to record lows. In the case of Japan and certain European countries, that has resulted in negative yields. Negative sovereign bond yields have become an epidemic, and Deutsche Bank said that $15 trillion in government bonds, or roughly 15% of the market, offered negative rates as of this summer. Yields are turning negative in corporate and high-yield bonds, too.

Germany, France, Switzerland and the Netherlands were among the European nations that recently had 10-year government bonds offering negative rates. Obviously, this makes for a sticky situation for global fixed-income fund managers such as Lynda Schweitzer, leader of the global fixed-income team at Loomis, Sayles & Co. and co-portfolio manager of its Global Bond Fund, which has roughly $813 million in assets and holds mainly investment-grade fixed-income securities worldwide.

She notes that Europe is a big piece of that fund’s benchmark, the Bloomberg Barclays Global Aggregate Index. While the Loomis Sayles Global Bond Fund is actively managed, it still needs to conform to the overall benchmark to some degree. So it has a weighting toward Europe that’s comparable to the index, but with some flexibility.

But the seesaw structural underpinning of bond investing—i.e., lower yields result from higher prices, and vice versa—creates a conundrum. For example, Schweitzer notes, the price of Germany’s 10-year sovereign bond has been on a roll with a 5% year-to-date return through July.

“We’ve had such a massive rally this year that if you didn’t hold European bonds you’ve underperformed your benchmark,” she says. “That’s the challenge that we face. We’re short-duration because our view is that bond prices are extremely rich and the negative yields don’t make a lot of sense to us. But it has been a detractor for the fund. We’ve had other things in the fund to offset it, but the short-duration stance hasn’t worked this year.” The fund’s institutional share class had gained 6.6% through August 8, versus a 0.14% loss for its index.

Italian bonds are another balancing act. Schweitzer says she has concerns about the stability of that country’s government and the amount of its outstanding debt. And like the rest of the eurozone, Italy is impacted by slow growth. Given these woes, investors demand extra premium to hold Italian bonds.

“We have some structural concerns about Italy, but right now we hold its bonds because Italy has some yield,” she says. The Italian 10-year government bond had a yield of 1.8% as of early August.

Entrenched Overseas

The International Monetary Fund forecasts euro area economic growth of 1.3% in 2019 and 1.6% in 2020. That trails projected global growth rates of 3.2% this year and 3.5% next year, as well as expected growth rates in most individual regions. But at least it beats Japan (0.9% growth in ’19 and 0.4% in ’20), which perhaps is the “sickest man” of the global economy.

The looming Brexit showdown (will it be a hard break or soft break?) and trade wars don’t help Europe’s economic situation.

“If there’s going to be a hard Brexit, it’s better to do it sooner than later because we’ll go through the pain, but economies will adjust and life will go on,” says David Souccar, international equity portfolio manager at Vontobel Quality Growth, the $30 billion long-only equity boutique of Vontobel Asset Management. “That said, part of the benefits of having the U.K. in the E.U. will be lost forever for both sides.”

Souccar is a portfolio manager on the Virtus Vontobel Foreign Opportunities Fund, which has a large-cap growth focus and was up 18.6% through August 8. He notes the market is discounting European stocks exposed to Brexit risks, resulting in what he says are good opportunities in the U.K. from both quality and valuation perspectives. “But you need a long-term view to invest in these opportunities because you’ll need to stomach a lot of volatility,” he says.

Regarding tariffs and trade wars and their potential deleterious effect on Europe’s leading exporters, Souccar sidesteps that by focusing on multinational companies with solid local footholds across the globe.

“European companies are ahead of the game because they went into emerging markets before everybody else and are entrenched on those markets,” he says. “And that’s not something that will go away, even in a trade war.”

Souccar says he favors companies such as L’Oréal, Unilever and Nestlé that are Europe-based but do business all over the world and are dominant in what they do. “They are posting growth and good margins,” he says.

He also likes companies with a niche within the European market. One such company is Cellnex, a Spanish wireless telecommunications infrastructure company. Another example is Vinci, a French company that Souccar says is one of the largest toll and airport operators in Europe. It also has substantial overseas operations.

“Despite all of the gloom and doom, you can still find plenty of exciting investing opportunities in European companies,” Souccar says.