One down, two to go. With the French election out of the way and votes due soon in Britain and Germany, I am sticking with what I said here on 29 March:
‘It is a mistake for investors to adopt a “little Englander” approach and assume the Continent has been cut off by the fog of Brexit. With global stock markets trading near record highs, Continental European shares and trusts invested in them remain reasonably priced – and positively cheap compared with American counterparts.’
The truth of that has been borne out by a bounce in the share prices of both the Europe-focused investment trusts I hold and named here in March. European Assets Trust (EAT), managed by Sam Cosh of F&C, has gained 9% in six weeks and continues to yield 5.6% – although it’s only fair to say the trust has gone ex-dividend today, before distributing income on 31 May.
BlackRock Emerging Europe Trust (BEEP), managed by Sam Vecht and Chris Colunga, has made more modest progress, rising from 315p to 333p. But – how to put this delicately? – democratic uncertainty is less of an issue in Russia and Turkey.
More importantly for long-term investors, developed and emerging markets in Continental Europe continue to offer reasonable prices compared to vertiginous valuations across the Atlantic. For example, analysis by StarCapital Research shows American shares are now priced on an average of 27.5 years’ corporate earnings but cyclically adjusted price/earnings (CAPE) ratios in Germany and France are 19.6 and 19.5 respectively.
While I remain worried that EAT may be over-distributing, those multiples are reassuring and this trust remains an effective way to make the most of tax-free income from individual savings accounts (ISAs).
In passing, I remain baffled why so many savers and investors who have no liability to capital gains tax (CGT) keep low-yielding assets in ISAs. What’s the point?
At the other end of the returns spectrum, BEEP looks well-priced to produce capital growth from current CAPE ratios of 10.1 in Turkey and just 5.3 in Russia.
Closer to home, you can see how uncertainty about Brexit has created opportunities for the brave in British shares which now trade on an average multiple of 15.3 according to StarCapital. That’s closer to the valuation in Russia than America, which must leave scope to surprise on the upside.
While international diversification has been a major theme of my asset allocation over the last four years – and a very profitable one, with sterling weakening until recently – a trend is only a trend until it stops. UK Plc may be just one bad news setback away from becoming a contrarian ‘buy’.
Investors are living through ‘interesting times’ in the sense of the Chinese curse. Political news and views will probably continue to influence short-term valuations but economic facts are likely to prove more important for long-term returns.
Closed-end funds offer structural advantages over open-ended rivals in volatile markets, not least because weak holders who bail out on bad news need not be subsidised by those of us who remain invested. Instead, the share price and discounts to net asset value (NAV) can take the strain; closed-end fund managers need not sell underlying assets at disadvantageous prices.
These may sound like technical points but can deliver real value and excess returns in volatile markets. Or, as I said here in March: ‘Bad news often creates good opportunities and investment trusts can help us cope with the surprises that stock markets hate.’
Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.