For a few months I have been bemoaning the fact that sentiment towards European Equity markets was so bad that it surely should get better. After all, economic recovery was ticking along – slowly and gently, and the ECB would very slowly be in a position where it might start to reduce the amount of Quantitative Easing (QE) further, and perhaps even consider raising interest rates later on in 2019. A year ago, after the French elections, we also thought that politics would ease back to be less relevant.
In May European economic news has continued to show growth is slowing (but still clearly positive), but politics has deteriorated sharply in Italy, and may also be getting worse in Spain. Rather than get lost trying to explain the intricacies of Italian Politics which are complex enough at the best of times, the result is renewed stress on the Euro. The premium investors demand to invest in Italian € denominated 10 Year Bonds has risen at times to over 3% from its more normal level in recent years of about 1.5%. it remains to be seen how much of the radical spending plans by the new collation will actually be implemented and, importantly, what the impact of that will be on investors’ perception of Italian debt.
In Spain, it seems quite likely that there will be a change of government, but since all parties are broadly in agreement on the economic path that needs to be followed, markets have been more relaxed. Nevertheless this political noise across Europe is a clear distraction from a reasonable economic and earnings background.
In Henderson EuroTrust we have reduced the level of gearing, from about 8% at the beginning of the month to just over 2% gearing at the end of the month. We have been earning a significant amount of Dividend income over the last few months and gearing has helped with this. We have sold Axa and our only Italian position, Intesa Sao Paolo Savings shares, and have reduced other financials such as ING and Credit Agricole. We have a very low exposure to banks in the portfolio now. We have also taken some of the profit from recent very strong performers such as Hermes, Deutsche Boerse and DSM, but they both remain large positions.
It is June. Trump has followed through with import tariffs on steel and may follow with more tariffs in an attempt to “Make America Great again” by blocking everyone else. Politics has deteriorated worldwide, and markets seem to hang on every “tweet” by someone. Attention spans are short and stress is evident. Trading volumes are low in markets and as a result we may have big swings and we may have just very quiet days where not much happens. There is also unlikely to be much news in terms of results from companies until mid-July. There is plenty of reason to take a more cautious stance and we have done so. Performance of Henderson EuroTrust has been well ahead of the index in May and so far this calendar year, but European equities remain out of favour and hence discounts have widened. We can’t do much about sentiment, but we can continue to focus on good quality long term growth companies which can increase the return to us as shareholders.
Gearing - A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.