Europe: A contrarian investor’s view…

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The UK’s referendum on membership` of the European Union has produced very little, so far, in terms of concrete change – instead it seems to have become the most bitterly fought contest to see who gets to say “I told you so” in modern history.

To this end the ‘remain’ side continues to forecast catastrophe for Albion with the theatrical zeal one would normally associate with a staging of King Lear (blow ye hurricanoes!), and the ‘leave’ side have seized upon the news that the damage they have done to the economy is ‘not as bad as everyone thought it would be’ as if this were in some way a reflection of the wisdom of their choice.

A politically fractured Europe cannot be desirable, given the continent’s relentlessly bloody history, but it is clear that something is rotten in the state of Belgium. The European Union has failed to answer critics who say it is lowering living standards for many, that weaker economies are suffering at Germany’s expense, stifling growth along the Mediterranean, and that it aims for a federalised state by the back door. The Brexit vote is just one example of growing political instability across the EU as resentment towards Brussels becomes more profound.

The Brexit vote is just one example of growing political instability across the EU as resentment towards Brussels becomes more profound.

The latest polls indicate that Norbert Hofer, a right-winger who claims the gun he carries with him on the campaign trail is a ‘natural consequence’ of immigration, is likely to win the Austrian presidential elections, the original result of which was overthrown earlier this year. The re-run was scheduled for early October but has now been put back by two months – adding an air of farce to an otherwise grim situation – because the glue on the ballot envelopes turned out to be faulty. The mind boggles.

Spain hasn’t had a properly functioning government for nine months and has held two general elections in the last six, and next year there are general elections in France – where the incumbent is the most unpopular president in the country’s history and his main rivals are a polyamorous midget facing corruption charges, and that nice lady from Le Nazi Party.

Germany meanwhile, goes to the polls in October 2017, and according to the latest economic observations, its economy has slumped, while the possibly heroic but probably doomed Angela Merkel’s ratings continue to fall amid growing unease over immigration and terrorism.

Not an entirely sunny outlook, then, but against this backdrop European investment trusts may actually represent an interesting option for opportunistic investors.

Political shocks, when they occur, will have a profound effect on share prices across the region with little regard to company fundamentals. In this turbulent period for Europe, this could provide the potential to acquire trusts which invest in some of the world’s largest, most established and most profitable companies – often multinationals – at a significant discount to net asset value.

European investment trusts may actually represent an interesting option for opportunistic investors

In the immediate aftermath of Britain’s surprise referendum result we saw the average discount in the AIC Europe sector double – falling from around 7% at the start of June to more than 14% in early July, by which point European equity funds had seen record outflows – losing $5.8bn in the week to July 13.

Investors, already spooked by the unexpected result of Britain’s referendum, were pulling out money hand over fist and piling into American equities as fears over the health Italian banks reached a crescendo. This behaviour assumes that the health of ‘Europe’ (i.e. The European Union) is the same thing as the health of companies which happen to be headquartered in European countries.

What a difference a day makes

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Source: Morningstar

But politics don’t define profitability, and a head office in Europe doesn’t mean a company must depend on Europe for customers.

The largest holding in JPMorgan European Investment Trust (Income Pool), for example, is Nestle, the largest food company in the world and one of the world’s most profitable companies, listed in Switzerland but in reality a ‘transnational’ with headquarters in various regions.

Jupiter European Opportunities’ pursues companies of a similar scale and counts Syngenta and Novo Nordisk – a pharma giant which sells its products in 180 countries globally – among its top ten. Syngenta is the world’s largest agricultural chemical producer and the third largest supplier of seeds and biotechnology on earth, with sales of more than $13.4bn – half of which were in emerging markets. It is based in Switzerland, which isn’t part of the EU anyway.

Politics don’t define profitability, and a head office in Europe doesn’t mean a company must depend on Europe for customers.

The list goes on, Roche Holdings, another Swiss pharma giant, appears in various portfolios’ top tens (JPM and Fidelity European Values, for example). The company has manufacturing sites in 26 countries and a major footprint in the world’s largest market for healthcare, the US. The company employs more than 80,000 people, recorded profits of $9bn (£6.8bn) in 2014, and has increased its dividend every year for the last 27 years.

The common theme here, other than the geographical location of headquarters, is that these are large, profitable multinational companies with operations in and revenues streams drawn from countries all around the world. As the continent stumbles from one crisis to the next the European investment trusts that own them are likely to see their discounts widen further.

 

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