For some time we have felt that world markets needed to curb their enthusiasm slightly. We used the expression “as good as it gets” as perhaps being an apt warning. But weight of money has driven everything higher, - until “weight of money” (aka ETFs perhaps) decided to swing the other way.
We believe that the trigger for this was fears of inflation returning with a vengeance and central banks “removing the punch bowl”. Now, while some of this may well be the case (the USA Federal Reserve has already started to raise interest rates), the situation in Europe remains a clear time lag of about 18 to 24 months. However, European markets have in the past sometimes worked on the basis that where the USA goes, we follow. Again this may be true – but we think that we have not yet reflected the improved economic, political and earnings situation. Accepted maybe that politics in Europe remains messy, but frankly I would prefer European politics than either the UK’s utter mess or the USA’s current predicament.
For Henderson EuroTrust we have been using this period of sell off to utilise the gearing facility, and by the end of February we were about 5% geared. We have more to spend (up to about 8% gearing) but will do so prudently. We believe it is important to remember that Europe is just entering the big dividend paying season (generally March to end June) and this has been a supportive period in recent years. I do not think the German 10-year Bund yield will rise much over 0.8% (it has been over 0.75% recently but then drifted back to just over 0.6%) and therefore feel that the Bund move reflects what may be the economic reality in a year’s time. However, I feel that we will also be remembering by then that we are actually still in a world of low growth and low inflation, and this partly explains the political anger vented in quite a few countries. But in a low growth world we feel we are better served by holding companies that produce consistent higher returns.
We have sold right out of newly listed Austrian bank Bawag on concerns that the environment is getting tougher for their relatively aggressive model, and also have sold out of Heineken. The result is total holdings of 47 – the lowest and therefore more concentrated for some time – while we have added extensively to our biggest positions, such as Geberit, Amundi, Deutsche Post, SGS and Deutsche Boerse.
We think that markets may continue to be volatile in the short-term, and we are likely to use weakness to continue to build positions in what we believe to be excellent companies. In our view, European equity markets look to be at attractive valuation levels relative to history, their growth in earnings and to the USA. Patience may be needed but the companies themselves we think are generally faring much better than has been the case in recent years and Merger and Acquisition activity is also picking up.
Weight of Money - refers to the volume of money either coming into or leaving equity markets
ETF’s – (Exchange Traded Funds) are a security that tracks an index. ETF’s trade like an equity on a stock exchange and experience price changes as the underlying assets move up and down in price.
Gearing – How much money the Trust borrows for investment purposes.
Bund – A German government bond.
Volatility – The rate and extent at which the price of a portfolio, security or index moves up and down.