Things are getting interesting. Any mention of the word “interesting” in the Investment context reminds me of the Chinese curse: “may you live in interesting times!”
European (ex UK – HNE does not invest in the UK) equity markets seem to be bearing the brunt of investors’ wrath, even though valuations, interest rates and the dividend paying season all should be supportive. Economic news continues to be good – but is also clearly showing that the actual rate of growth is beginning to slow. That environment has sometimes been nicknamed “Goldilocks” in that growth is neither too hot (interest rate rises may be imminent) nor too cold (a recession may be in sight). The ECB has also made it quite clear that it is in no hurry to increase official interest rates, but it has started to reduce the amount of Quantitative Easing (which means they will buy fewer bonds than has been the case in the last few years). Perhaps the European markets are being spooked by the “trade war” rhetoric emanating from the USA, and the fact that the USA has started to increase interest rates over a year ago?
Back in the “real” world most companies have been relatively upbeat in meetings discussing their full year results, and dividends have been increased at least in line with profits growth (in most cases). At the same time companies have been quite open about the fact that the weakness of the US $ against the € is making life a little more difficult – but most of this is simply because of the “translational” impact of currency rather than the more serious problem of producing goods in a more expensive country.
So should we listen to those saying that there is a bear market ahead? Is the best behind us? As always there may be elements of truth in some of this, but there are “bear” and “bull” markets in all sorts of sectors at different times! It is perhaps more interesting to ask “Are some company valuation levels looking interesting for the medium and long term investor?”
We think there are some interesting companies in Europe, and since we now have a £25m borrowing facility in place and are using only a tiny part of that, this may be time to be adding to some positions and we have been doing just that.
As always when investing, we will require patience. An investor considering Henderson Eurotrust might want to bear in mind that at the end of March 2018 HNE shares were trading at a discount to the underlying NAV of about 7.5%, even though that discount may well widen if sentiment towards European (ex UK) equity markets deteriorates even further.
Translation risk - the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes.
Quantitative Easing - a measure whereby a central bank creates large sums of money to purchase government bonds or other securities, in order to stimulate the economy.