Ian Cowie casts an eye across the Channel in search of intriguing investment opportunities
Despite the historic new agreement between Prime Minister Rishi Sunak and the European Commission President, Ursula von der Leyen, Brexit continues to divide opinion in the United Kingdom. But politics should not distract investors from considering economic opportunities in Europe.The continent is home to many businesses that lead the world in their commercial sectors and can provide valuable diversification from American and British assets. Investment companies offer cost-effective and convenient ways to share the cost of professional stock selection in markets that trade in languages other than English, within foreign fiscal and legal frameworks.
For example, the Swiss maker of Kit Kat chocolate and Nescafé coffee, Nestlé (stock market ticker: NESN) is the most valuable food company in the world.
It is also the largest underlying holding in Fidelity European Trust (FEV), representing 7% of the total assets of this £1.7 billion giant of the Association of Investment Companies (AIC) Europe sector.
“The Swiss maker of Kit Kat chocolate and Nescafé coffee, Nestlé (stock market ticker: NESN) is the most valuable food company in the world.”
FEV’s top ten holdings also include Novo Nordisk (NOVO), the Danish company owned by a charitable foundation that is the world’s largest producer of insulin, a drug that can help diabetics control their blood sugar levels. EssilorLuxottica (EL), the Franco-Italian giant that makes a third of the world’s spectacle lenses, also ranks among major holdings, although EL is probably less well-known than its sunglasses brands Oakley and Ray-Ban.More importantly, FEV has achieved the highest total returns in its sector over the last decade and five years. According to independent statisticians Morningstar its performance over the last decade, five years and one year was 204%, 78% and 17% respectively.Those returns are all the more remarkable when the average total returns from all AIC funds were 167%, 76% and minus 0.5% respectively. For comparison, the Europe sector averages over the same three periods were 161%, 43% and 11%.JPMorgan European Growth & Income (JEGI) ranks first in this sector over the last year with underlying holdings that include the Dutch semiconductor chip-maker ASML Holdings (ASML) and the Swiss pharmaceutical giant Novartis (NOVN). Both businesses are benefitting from ‘onshoring’ or ‘friendshoring’ trends to source goods and services closer to consumers, as rising international tensions tend to reverse earlier decades’ moves toward globalisation.Income-seekers will note that JEGI yields 4.2%, with dividends having increased by an annual average of 19% over the last five years. By comparison, FEV pays 2% income, which increased by an annual average of just over 10%.BlackRock Greater Europe (BRGE) deserves a favourable mention because it ranks second over both five and ten-year periods. Its total returns over the standard three periods were 186%, 77% and 1%.
BRGE’s top ten holdings feature another commercial sector where Europe leads the world: luxury goods makers LVMH Moet Hennessy Louis Vuitton (MC) and Hermes International (RMS). Sales of champagne, cognac and expensive scarves and handbags have held up surprisingly well among aspirational consumers, despite the widely reported cost of living crisis elsewhere.
Some smaller companies on the continent have also delivered big returns to long-term investors. European Smaller Companies (ESCT), the self-descriptive £863m investment company, achieved total returns of 307% over the last decade, followed by 32% over five years and 11% over the last year.
As you might expect, ESCT’s underlying holdings contain fewer household names but delivered dividend income of 2.6% rising by a remarkable annual average of 25% over the last five years.With one eye on paying for retirement, this income-seeker chose European Assets Trust (EAT), which yields dividend income of 6% that has increased by an annual average of 4%.However, it is only fair to admit that the price of a higher income today has been lower total returns recently from EAT. It has delivered 121%, 6% and minus 7% over the usual three periods.More importantly – and more positively – two of my top ten holdings by value demonstrate how investment companies outside the AIC’s Europe sector often have significant exposure to continental businesses. For example, Ecofin Global Utilities & Infrastructure (EGL) offers exposure to the Italian energy giant, Enel (ENEL) and the Spanish transport infrastructure group, Ferrovial (FER).
Meanwhile, Worldwide Healthcare (WWH) includes in its top ten assets the French pharmaceutical giant Sanofi (SAN) and its Swiss rival, Roche (RO).
“It makes sense for investors to consider a positive approach to European opportunities, just as Sunak and von der Leyen have done with their new Brexit deal at Windsor.”
Europe’s worst war since 1945 depressed valuations immediately after Russia invaded Ukraine last year, but continental bourses are beginning to recover their poise. Similarly, it makes sense for investors to consider a positive approach to European opportunities, just as Sunak and von der Leyen have done with their new Brexit deal at Windsor.Ian Cowie is a shareholder in European Assets Trust (EAT), Ecofin Global Utilities & Infrastructure (EGL), EssilorLuxottica (EL), Nestlé (NESN), Novo Nordisk (NOVO) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment companies and other shares.
