- After a strong H1, the resurfacing of volatility over recent weeks underlines the fact that few of the issues troubling European markets have been resolved.
- We remain focused on investing in attractively-valued companies which are able to sustain consistent dividend growth, irrespective of the macro backdrop.
- A number of these types of companies have also benefited from the recent shift down in bond yields although it is important to be highly selective in the current environment.
While continental European equity markets rose strongly over the first half of 2019, the resurfacing of volatility over recent weeks has served a timely reminder that few of the issues previously troubling markets have been resolved. Trade threats rumble on, political uncertainty remains high and the “Brexit” can has been kicked down the road.
Fundamental progress across Europe has also been lacklustre at best. The German economy remains sluggish, partly due to the slowdown in global automobile markets, particularly in China. The Italian economy has dipped into recession and we have seen Prime Minister Giuseppe Conte resign after Deputy Prime Minister Matteo Salvini announced his intention to break the fragile coalition with the Five Star Movement.
Elsewhere, concerns around the knock-on effects of a possible “no deal Brexit” continue to plague certain stocks and sectors that have a relatively high exposure to the UK. Given this backdrop, the earnings growth of Continental European companies has been steadily revised down from close to double-digits at the start of the year to a mid-single digit figure now.
From a market perspective, the recent dovish shifts from central banks has been welcomed by investors but looking ahead there is a risk that easier policy fails to kick-start global economic and corporate earnings growth. The yield curve inversion in the US, with three-month interest rates moving above ten-year rates, and the narrowing of equity leadership, with very large companies outperforming, both suggest that this long economic, and stock-market, upturn may be nearing its end.
The conundrum is that the market already seems to be anticipating this given the growing dispersion in valuation between companies. Investors already appear to be very sceptical of the sustainability of earnings in more cyclical sectors.
Plotting a way ahead
Against this uncertain backdrop, both the Fidelity European Fund and Fidelity European Values PLC remain as always focused on investing in attractively-valued companies which are able to sustain consistent dividend growth; and most importantly can perform well across different market environments, irrespective of the macro backdrop. History shows that over the long-term these types of companies tend to outperform the broader market and we see no reason for this to change going forward.
The challenge of finding companies that meet these criteria in the current environment has led to a reduction in the number of names in the portfolio over the past 12 months. That said, there are still selective opportunities and we have seen the likes of LVMH perform strongly on the back off encouraging results from two of its bigger brands: Louis Vuitton and Christian Dior. The company seems to be taking full advantage of the growing consumption of wealthy Chinese customers.
More broadly, the portfolios have benefited from the recent decline in bond yields given that a number of our larger holdings - with Nestle being a case in point - are considered to have bond-like characteristics and are valued accordingly.
We continue to maintain a balanced sector exposure, with a marginal overweight in defensive stocks. As more optimism is now priced into the market, following the Fed “pivot” and shocks around trade (e.g. US/China) or geopolitics (e.g. US/Iran) are still probable, we remain generally cautious. In the case of Fidelity European Values PLC, this is highlighted by the fact that net gearing of the trust is now at the lower end of the historic range of the strategy.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity European Fund and Fidelity European Values PLC can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.