Interactive Investor

Ian Cowie: never mind the politics, now’s the time to look for bargains

There was market shock at French President Emmanuel Macron calling a snap election, but volatility is an opportunity to potentially buy at attractive entry points. Our columnist explains how he invests in Europe, and considers eye-catching discounts.

20th June 2024 08:56

by Ian Cowie from interactive investor

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Sacré bleu! Stock market shock at the French president, Emmanuel Macron, calling a snap election knocked €220 billion (£187 billion) or 5% off share prices in Paris last week. Several blue-chips or big, long-established businesses, including the insurers and banks Societe Generale SA (EURONEXT:GLE), BNP Paribas (EURONEXT:BNP) and Crédit Agricole (EURONEXT:CIV), plunged by more than 10%.

Never mind the politics; what about the economics? Continental Europe remains home to several world-leading businesses and lower share prices might offer more attractive entry points for international investors seeking diversification, growth and income.

Better still, investment trusts in the ‘Europe’ sector still trade at an average of -8.4% below their net asset value (NAV) - a deeper discount than the -6.9% average for all types of investment trust - despite delivering total returns of 149%, 51% and 14% over the past decade, five-year and one-year periods. ‘Europe: Smaller Companies’ trusts are even cheaper, trading at an average -11.4% discount after returning 150%, 46% and 12% over the same periods.

What about specific examples? Step forward Fidelity European Trust (LSE:FEV), which leads its sector of seven shares over the past decade and five-year periods with total returns of 203% and 80%, but currently languishes fifth over the past year with gains of 13%. While shareholders - including your humble correspondent - wait to find out if this is a short-term setback and an opportunity to top up or the start of a long-term problem, we are paid to be patient with 2.1% dividend income that has risen by an annual average of 5.6% over the past five years. Its current discount is -5.5%.

What’s under the bonnet? ASML Holding NV (EURONEXT:ASML), the Dutch business that makes machines that make semiconductor chips, is FEV’s biggest holding; closely followed by Novo Nordisk A/S ADR (NYSE:NVO), the Danish company that makes the weight-loss drugs Wegovy and Ozempic; with Nestle SA (SIX:NESN), the Swiss firm that is the world’s most-valuable food and drink business in third place.

So, FEV’s top triumvirate offers professionally managed exposure to high-flying investment sectors including artificial intelligence (AI), healthcare and nutrition. This £1.9 billion investment trust’s top 10 underlying holdings also include the French luxury brands conglomerates LVMH Moet Hennessy Louis Vuitton SE (EURONEXT:MC) and Hermes International SA (EURONEXT:RMS); plus the Franco-Italian eyewear giant Essilorluxottica (EURONEXT:EL), which owns Oakley and Ray-Ban sunglasses and makes a third of all the optical lenses on this planet.

Henderson European Focus Trust (LSE:HEFT) is the sector leader over the past year with a total return of 21%, following 76% over five years and 147% over the decade. It is also notable that HEFT is trading at a -9.2% discount to NAV and its 2.3% dividend yield is rising by 7% per annum. While dividends are not guaranteed and can be cut or cancelled without notice, if that rate of ascent is sustained it would double shareholders’ income in just over a decade.

Underlying top holdings at this £465 million trust are led by NOVO and then ASML, followed by the French oil giant TotalEnergies SE (EURONEXT:TTE). While the Champagne-to-handbags giant features again, HEFT’s biggest assets also include heavier industrials such as Schneider Electric (EURONEXT:SU), the French power controls group; and Siemens Energy (XETRA:ENR), the German civil engineer.

The European Smaller Companies Trust (LSE:ESCT) leads the four-trust sector its name describes over all three of the standard comparison periods with total returns of 213%, 91% and 19%. Even so, ESCT still trades at a -11% discount to NAV and yields 2.6% dividend income, rising by an eye-stretching annual average of 15% over the past five years.

As you might expect, none of the foreign corporate tiddlers ESCT holds could be described as household names in the United Kingdom. But this £898 million trust would have been a much better bet than European Assets (LSE:EAT) Trust, which I selected for its above-average 6.7% dividend income, albeit falling by an annual average of minus 6.6% over the past five years.

Worse still, EAT ranks rock bottom in its sector over the past decade and five-year periods, with total returns of 73% and 11%, followed by a meagre 3.8% over the past year. No wonder this trust is priced -11% below its NAV and serves as a reminder that the price of a high income today can often be low or no total returns tomorrow. Je suis choqué!

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in EssilorLuxottica (EL), European Assets Trust (EAT), Fidelity European (FEV), Nestlé (NESN) and Novo-Nordisk (NOVO).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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