Focusing on what matters in Europe

Sam Morse
Sam Morse
Portfolio Manager, Fidelity European Values PLC6 March 2018

The last 12 months or so have been a rewarding period for investors in the stock markets of continental Europe as companies grew their earnings substantially and valuations continued to expand. Sterling-based investors enjoyed even higher returns thanks to the continuing appreciation of the Euro against most major currencies including the pound. It was also a year of remarkably low levels of volatility, which has proven to be the calm before the storm at the start of 2018.

After a rewarding 2017 and a hiccup to the start of 2018, many investors are anticipating ‘more of the same’ this year, given improving global economic growth and a lack of attractive investment alternatives. While valuation multiples remain highly elevated versus history, the risk of a significant market correction remains palpable. However, if anything the last 12 months have shown that ‘timing’ the markets can be costly and it is not a strategy that we employ in managing our portfolios.

There are yet again important elections to consider in continental Europe - with the Italian parliamentary elections the most recent one to take centre stage. While this was seen as more of a risk to confidence in Europe, last years’ events have shown that a strengthening economy, which we are seeing in Europe albeit from a low base, can undermine political worries in equity markets.

In terms of our current positioning, we are slightly underweight Italian stocks but it is important to recognise that this is a function of stock picking and investment style, rather than a deliberate portfolio allocation.

The strength of markets in recent months has made it increasingly difficult to identify attractively valued new ideas and we have also moved to sell out of a number of cyclical stocks on valuation grounds. Given current conditions, it is important to focus on our highest conviction investment ideas and robust companies that sustainably grow their dividends and perform through the investment cycle.

While we will not be immune in the short-term from changes in the stock market or economic environment, history has shown in the longer-run these sorts of companies have the potential to deliver strong returns versus the broader index.

More on Fidelity European Values PLC

Five year performance

(%)

As at 31 Jan

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

 MSCI Europe

11.2

6.8

-2.3

23.5

16.7

Past performance is not a reliable indicator of future returns

Source: Thomson Reuters Datastream, 31.1.13 to 31.1.18 in GBP with income reinvested

Glossary:

Cyclicals: Cyclical stocks relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession. A cyclical stock’s price will be more affected by ups and downs in the overall economy, than a defensive stock.


Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.