Fidelity European Values PLC (the Company) has announced its half-yearly results for the six months ended 30 June 2018, highlighting positive performance despite weak equity markets in Continental Europe.
With the US approving tariffs on imported washing machines and solar panels, followed up with the announcement of proposed tariffs on imported steel and aluminium, markets which had recovered their poise somewhat after a robust set of first quarter earnings results fell back again to end the half year in negative territory.
Over the six-month period, the Company’s Net Asset Value (NAV) returned +2.3 per cent, compared to a return of -1.4 per cent for the FTSE World Europe (ex UK), the Company’s Comparative Index. The share price return was +0.7 per cent, following a widening in the share price discount to NAV.
The energy sector was the standout performer in Europe in the first six months of 2018, as the oil price continued to rise. The major integrated oil companies also delivered on their plans to improve operating and capital efficiency, enabling them to generate more cash and sustain attractive levels of dividend.
The technology sector performed strongly too, led by the strength of the sector in the US stock market which has made European peers seem relatively inexpensive.
Giving his outlook for the region, portfolio manager Sam Morse (pictured), says: “Investors in Continental European markets appear increasingly cautious. This is not surprising given that we are, most likely, in the later stages of the economic and stock-market cycles.”
“There is also uncertainty about the outlook in many directions: political and economic. Sentiment has swung considerably in six months from positive to negative; the widening discount of the Company is, perhaps, a notable indicator here.”
“There is a growing concern that protectionism will slow the pace of global economic growth. Meanwhile input costs, such as oil and wages, continue to rise which may put further pressure on the margins of Continental European companies. The profit cycle may be peaking at a time when there is little valuation support in equities and at a time when interest rates and bond yields are rising which drains the liquidity that has supported equity markets since the global financial crisis.”
“The bull case is that America’s trade partners will climb down and negotiate a truce to end the ‘trade wars’. Dispersion in valuations has grown with less favoured parts of the market such as the automobile and financial sectors appearing now to be very ‘cheap’ if earnings hold up. If sentiment swings again, markets could snap back with a sharp ‘value-led’ rally.”
“The Company will continue, however, to maintain a focus on attractively-valued cash-generative companies, with strong balance sheets, which have the potential to grow their dividends consistently over a three to five-year period.”