Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
As with most people, we are sick of discussing Brexit’s endless possible scenarios and how it might impact equity markets. The outlook is forever shifting, the large majority of “information” being pure conjecture.
Nevertheless, the political and economic backdrop means that Europe is now one of the most out of favour investment regions. In the open ended IA sector, Q3 and Q4 of last year saw total outflows of -£1.575bn in Europe, relative to the US and Global sectors which saw inflows of £289m and £114m respectively. Only the UK saw greater outflows. The discounts on closed-ended funds also suggest an out-of-favour asset class. As can be seen below, relative to both historical averages and global peers, European investment trusts are good value. In fact, Europe is even more out of favour than the UK, judging by discounts.
Being able to pick up exposures on wide discounts and supercharge returns as those discounts close is one of the most exciting benefits of investing in closed-ended funds, so the fact Europe is so out of favour should be piquing interest.
In our view there are good fundamental reasons to have exposure to Europe over the long run. Chief among these are the diversification benefits provided by the very different businesses that European stock markets provide relative to those available in the UK.
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