April has been a better month for European markets. While economic data for the European area has continued to slow somewhat, the reaction to this has been mixed: should the market be concerned that growth is slowing and therefore earnings might start to decline, or should the market be relieved as this means that the ECB will not tighten its monetary policy too much too early? Europe, once again, is sandwiched in the middle of this debate by the UK on one side (has started to tighten monetary policy) and the USA which has been tightening monetary policy since December 2015 (albeit with a long pause after the first increase in rates).
While this debate is relevant for the implications of the global economic cycle on Europe’s companies which are for the most inextricably linked to that cycle, it sometimes diverts attention away from what the companies are achieving.
These achievements have tended to come across in results for the first calendar quarter, which for the most part have confirmed modest expectations for further growth in earnings in 2018. What has been obvious however is that the weakness of the US $ has been a headwind for many companies which should ease as the $ rallied towards the end of April, and also as the year on year comparison was at its worst in Q1.
I am continuing for the time being to work along the lines of a slow rate of growth in the European (ex UK) area, and a reasonably benign global growth backdrop – Goldilocks if you like, where growth is neither too hot nor too cold. Having said that, I am also a subscriber to the view that the investment climate is becoming more complex as the huge monetary stimulus (Quantitative Easing) of the last few years is gradually withdrawn.
European markets have entered the main dividend paying season and Henderson Eurotrust has started receiving the dividends as expected.
We have not made many changes to the portfolio over the last month, but have begun to utilise a larger part of our (increased) £25m borrowing facility.
European equity markets continue to be underpinned by reasonable earnings growth, lower valuation levels than many other areas and a stable economic outlook. There will continue to be plenty of what in a theatre is sometimes referred to as “noises off”, but underlying company progress is good. We believe this is a time to patiently earn that dividend income and not to get too distracted by clowns.
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.
Capital at risk, not advice.