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Fear not, I am done writing about investment trusts. Now I just need to buy one. We also lost a couple of weekends, didn’t we, pondering how to join the private equity cowboys? I still want in here, too — most likely via a fund of listed players.
Both closed-ended funds and private equity are out of favour. This always makes me vibrate like a tumble drier. (Beat that, Dr Dre!) But now there’s a new asset class jiggling my contrarian bones: European equities.
Everyone lost it when populists did well in Europe’s parliamentary elections this month. President Macron then compounded matters by calling a snap poll, with investors fretting over Marine Le Pen’s far-right party and the leftwing Nouveau Front Populaire.
Markets spasmed. French stocks dropped 7 per cent in a little over a week before recovering some. European bond yields rose, credit spreads widened, and many fear a Liz Truss-style convulsion in France as both ends of the political spectrum seem lax on finances.
All of which has spoiled the party a bit. Despite Germany’s economy being in a funk and gross government debt levels versus output in Spain, Italy and France exceeding 100 per cent, the bloc’s equity markets have boogied since January.
I’d been watching them from the sidelines, unfortunately. As you can see, my portfolio has no exposure to European assets whatsoever. Hence I missed out on the 9 per cent rise in the Stoxx 600 ex-UK index before the latest slip.
This never felt as lonesome as my zero in US shares — they are up 15 per cent this year. But it pains me because continental Europe accounts for roughly a tenth of the Morningstar 60-80 per cent equity index against which I measure my returns.
Why haven’t I owned any European companies? For the same reason I’ve been wrong about US ones since October. I’ve often mentioned my first boss who used to say, “never bet against America”. Well he also warned: “Never overestimate Europe.”
This had nothing to do with growth or productivity — both are often higher than we achieve in the UK. Nor politics, which is no more or less volatile than elsewhere. Greece even topped The Economist global economic rankings last year.
Sure, we purists bemoan the incongruity of a single currency zone made up of discrete fiscal-raising entities. Or that a single monetary policy cannot possibly be appropriate for all 20 members of the Eurozone at once.
No, my boss’s negative view was more about returns on equity. As with Japan, the fact was that managers and employees of continental businesses simply didn’t obsess themselves with shareholders as US ones did. And they still don’t.
It’s a cliché that German engineers would rather make a perfect turbine, Italians beautiful handbags, and the French nothing, it’s summer. But as a fund manager I visited thousands of companies. You can tell who cares about their stock price.
Europe will never outdo the US on this score (no one will, to be fair.) So it is no surprise that the S&P 500 has outperformed European ex-UK shares by almost five times over the past two decades. Likewise, there are only three European names in the MSCI World’s top 30 and not a trillion-dollar valuation in sight.
As with liars and philanderers, form matters when it comes to trusting an investment. Fundamentals rarely change. If this was the only consideration, however, I would own US stocks. Prices get out of whack. Short- or medium-term opportunities pop up.
Is this recent drop in European shares one of them? To answer this question it first pays to know what I would be buying. Like my analysis of Asian funds, the sweeping term “Europe” covers a disparate collection of nations and businesses.
I’m going to focus on the Stoxx 600 ex-UK index, as it’s much broader than the Stoxx 50 and I already own UK stocks. Something about the former that immediately appeals is the low concentration risk — despite a heavy tilt towards France.
For example, the top five companies in the S&P 500 make up a quarter of the index, roughly 50 per cent more concentrated than in Europe. That’s fine for some — indeed the narrower Stoxx 50 index is spookily aligned with the S&P 500 in terms of concentration.
Trouble is, I don’t like where the concentration is — on either side of the pond. In the US it’s all artificial intelligence. As me old mucker Robert Armstrong calculated last week, AI is responsible for all the gains in the S&P 500 since the end of March. The rest of the market is down.
Sure, I’ve missed the rally in Nvidia, but I don’t want to own it now on 20 times forward revenues (you read that right: revenues, not profits). Nor in Europe do I like that Novo Nordisk — manufacturer of blubber-shredder drugs and top name in the Stoxx 600 ex-UK index — has a forward price-to-earnings ratio of almost 40 times.
But even Super Novo is only 5 per cent the benchmark — compared with Nvidia and Microsoft at 6.5 and 7 per cent of the S&P 500 respectively. And while Dutch chipmaker ASML has ridden the AI boom, it has a smaller weight again at number two.
And I’m partial to the rest of the top 10, frankly. LVMH and SAP are world leaders. Meanwhile, food, energy and numerous other pharma companies spew cash flow.
Is Europe cheap enough for me to justify selling one of my other funds to pay for it though? The trailing price/earnings ratio even of the concentrated Stoxx 50 is 14 times, according to Bloomberg data.
That makes my FTSE 100 fund seem dear after its strong run this year. Likewise, Japan and Asia. Sorry boss, I may have to look into this a little more.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
https://www.ft.com/content/f32a77f3-d46a-45c7-b869-fec66a53bd7d
