European markets have made no progress in September, but I am pleased to say that Henderson EuroTrust has continued to keep its nose just ahead of our benchmark index. There have been warnings from Bayer and Continental, the former on caution about the Monsanto deal and the latter on tougher times in the Auto sector, which was further emphasised by a downgrade to targets from BMW (Henderson Eurotrust has held no positions in these companies for quite a while, skilfully or fortuitously as you may choose). There has also been political noise in the form of further tension within Chancellor Merkel’s coalition in Germany, concern about the likely Budget Deficit in Italy as the spending plans for 2019 are prepared, and finally the never ending saga of Brexit. With the European Central Bank still flagging its intention to continue to buy fewer Bonds over the next six to twelve months, there is clearly a gradual drying up of liquidity and coinciding with this a plateauing of economic growth expectations. All these “macro” events explain why Europe remains a relatively unpopular region for Global Investors, in spite of a steady improvement in company earnings – with some exceptions as always.
We are maintaining a small liquidity position but have been building the size of our highest conviction positions where we have felt these have fallen to interesting levels on a medium to long term basis. The Annual Report of Henderson EuroTrust which will be published shortly, will have a lot of details in it as ever, and one of the notable differences is the increase in the weight of our Top ten holdings in the portfolio overall.
Politics will continue to rumble on: Germany has begun the slow progression to a “post Merkel” era but no-one yet knows what that might mean. My guess is a continuation of consensus centrist policies. Italy will be noisy – by definition when there is a coalition between a relatively far ‘Left’ and a relatively far ‘Right’ party (we currently have no holdings in Italy). Brexit is a UK problem that will have knock on negative impacts across Europe, but Investors in Henderson EuroTrust might wish to remember that we have no UK holdings. We also continue to favour consistent, quality, long term compounders, while fully accepting that some of these have begun to look quite expensive relative to their long term valuation levels. But that premium reflects the expectation of reliability.