Investment Trust Insights: Europe is Cheap

A Closed-end Fund Forum reveals that investment trust managers think European stocks are among the 'cheapest in the world' right now

Jackie Beard, FCSI 22 October, 2013 | 10:58AM
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Last week we had the latest instalment in the Best Advice: Closed-end Fund Forum webinar series. This month the focus was on Europe, particularly given the recent elections. David Harris of InvaTrust was the moderator and he was joined by Stephen Macklow-Smith of JPMorgan and Jeremy Thomas of Allianz. The aim of the discussion was to help advisors understand the issues and challenges of a new political and economic landscape that may occur in Europe and how it may impact investment decisions.

Both managers believe Europe is cheap right now and indeed that it’s one of the cheapest areas in the world. Macklow-Smith cited the fact that excessive risk premium has been attached to European assets for most of the last five years, partly due to uncertainty over the euro as a currency and partly because Europe has struggled to grow domestically. But an investment in a European company isn’t just about investing in Europe, in the same way that investing in the UK mega-caps isn’t about investing in the UK. Indeed, half of corporate revenues in Europe come from outside Europe.

Macklow-Smith went on to say that the political will to stand behind the euro was greatly underestimated by the rest of the world. His research shows him that there is a far greater willingness from European countries to do what it takes to be a member of the euro than people in the UK and US realise.

It’s important to remember that political Europe is not the same as economic Europe and economic Europe is not the same as corporate Europe.  Within corporate Europe, there has been a massive change in the treatment of shareholders, whose rights are increasingly being protected. Nonetheless, if looking for income, Thomas notes that it’s much easier to consider Europe including the UK for a global portfolio.

Further, he believes it is important to remember that while Europe is cheap, the cheapest companies tend to be in the periphery countries. But it’s not always that easy to invest in these opportunities. Take the example of Portugal—the market cap of the Portuguese stock market is about €20 billion, which puts it at roughly the same size as Centrica in the UK. So for a large-cap manager it’s pretty hard to access some of these markets.

To listen to the full discussion and hear the managers’ investment ideas for the next 18-24 months, click here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Jackie Beard, FCSI

Jackie Beard, FCSI  is Director of Manager Research Services, Morningstar EMEA

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