Ian Cowie hunts for opportunities in Europe
The Russian invasion of Ukraine has had - and continues to have - a heavy toll in terms of human lives lost. Europe’s worst war in more than 70 years has also shocked global stock markets because Ukraine is a major source of grains, such as wheat, and Russia is a big exporter of energy, such as liquefied natural gas (LNG) and oil.
Both negative impacts on the basic human needs for eating and heating may be felt more keenly when summer gives way to winter. More immediately, with the Black Sea closed to grain ships and transcontinental gas pipelines blocked, squeezing the supply of commodities has caused prices to soar. Eurostat, the statistical office of the European Union, reckons inflation across the EU was rising at an annual rate of 8.1 per cent in May. If that rate of ascent is maintained it would halve the real value of money - its purchasing power - in less than nine years. No wonder several global stock markets had their worst first half year in 2022 for half a century, with the American Standard & Poor’s 500 — a broad measure of the biggest economy in the world — losing 21 per cent of its value since January. Germany’s DAX index, which tracks 40 of the biggest companies on the Frankfurt Stock Exchange, and France’s CAC 40, a benchmark of the same number of businesses on the Euronext exchange in Paris, fell by 20 per cent and 17 per cent respectively. So there are plenty of obvious reasons to be pessimistic and these are reflected in short-term returns. What is less obvious is whether these might create opportunities for long-term investors. The EU remains home to many blue chip businesses - or large and long-established companies - including the German car-maker Volkswagen (stock market ticker: VOW), its biggest business by revenues; and the French luxury goods giant LVMH Moet Hennessy Vuitton (MC), its largest by stock market capitalisation or value. Looking more widely across the Continent’s single market, Switzerland’s Nestlé (NESN) is the most valuable food company on this planet by stock market value. Less high profile European leaders include Denmark’s Novo Nordisk (NOVO), which makes half the world’s insulin, a drug to treat diabetes that is in growing demand as the the global population tends to get heavier. Given wide variations in language, legislation and taxes across the Continent, the most convenient and cost-effective way to gain exposure to its economic opportunities is via a pooled fund. These can diminish risk by diversification and share the cost of professional asset allocation. All the businesses above - and many others - have enabled the Association of Investment Companies’ (AIC) ‘Europe’ sector to deliver average total returns of 192 per cent over the last decade. Looking lower down the corporate ladder by scale, the AIC’s ‘European Smaller Companies’ sector did even better with average total returns of 279 per cent, according to independent statisticians Morningstar. Both achievements beat the AIC all companies ex-venture capital trusts’ average of 189 per cent over the same period.
To be specific, Fidelity European (FEV), by far the biggest fund in the AIC ‘Europe’ sector with total assets of nearly £1.5 billion, is also its top-performer over all three standard periods; with total returns of 234 per cent over the last decade, 49 per cent over five years and minus 6% over the last dismal year. FEV’s top 10 assets include NESN, NOVO and the Franco-Italian giant, EssilorLuxottica (EL), which makes a third of the world’s spectacle lenses, as well as sunglass brands including Oakley and Ray-Ban. That’s awkward for me, because I already own shares in NESN and NOVO - which are both among my ‘forever fund’ top 10 holdings - and also EL. So, merely to avoid duplication, it’s no FEV for me. Instead, I hold shares in European Assets Trust (EAT), currently one of the weaker performers in the AIC’s ‘European Smaller Companies’ sector, with total returns of 210 per cent; minus 1.5 per cent and minus 27 per cent over the three standard periods. An eye-stretching dividend yield of 9.5 per cent provides some compensation. Better total returns were achieved among blue chips by BlackRock Greater Europe (BRGE), its sector’s second-best performer over the last five years; and Henderson European Focus (HEFT), joint-top performer over the last decade. Montanaro European Smaller Companies (MTE) leads its sector over five years, while European Smaller Companies (ESCT) is in pole position over the last decade. To return to where we began, it was during another bloody conflict on the Continent that the banker Nathan Meyer Rothschild is reported to have recommended investing when confidence and prices are low - and taking profits when both are high - when he said: “Buy to the sound of cannons, sell to the sound of trumpets.” The Napoleonic Wars were more than 200 years ago and modern revisionist historians now question whether Rothschild ever really uttered these words. However, long-term investors may believe that buying low and selling high remains as good advice today as it was back then. Past performance is not necessarily a guide to profits in future times because history rarely repeats itself but, as the writer Mark Twain pointed out, it often rhymes. Ian Cowie is a shareholder in European Assets Trust (EAT), EssilorLuxottica (EL), Nestlé (NESN) and Novo Nordisk (NOVO) among a globally-diversified portfolio of investment trusts and other companies’ shares.
